Nov. 11 (Bloomberg) -- Former U.K. finance minister Kenneth Clarke said Bank of England Governor Mervyn King is unlikely to seek interest-rate increases in the next year as the longest recession on record keeps inflation in check.
“The governor of the bank is going to face an absolutely crucial decision,” Clarke told reporters at a lunch in London yesterday. “I don’t think he’s likely to want to put up interest rates in the next 12 months.”
The Bank of England will today publish economic growth and inflation forecasts as policy makers seek to gauge the impact of their decision last week to expand their bond-purchase program to 200 billion pounds ($335 billion). The bank has kept the benchmark interest rate at a record low of 0.5 percent since March to combat the slump.
“Sooner or later you’re going to have to reverse” the asset-buying program, said Clarke, who served as chancellor of the exchequer in the last Conservative government, from 1993 to 1997. “All the disinflationary influences are so strong” that inflationary pressures probably won’t materialize in the next year or two, he said.
The Bank of England said last week it predicted “a slow recovery” in the U.K. economy. The bank said in its previous forecast round in August that inflation, currently at 1.1 percent, would miss the 2 percent target in three years.
“On balance we believe the committee will raise its projection significantly closer to the 2 percent target, assisted by the effects of the further extension in quantitative easing and a flat rate profile,” David Tinsley, an economist at National Australia Bank in London and a former central bank official, said in a note yesterday.
‘Unchartered Waters’
Clarke said that the effects of the bank’s bond-purchase program are hard to gauge.
“Nobody knows really what quantitative easing is going to turn out to do to the British economy and nobody knows really what happens when you stop,” said Clarke, who is now the Conservative lawmaker who speaks on business policy. “We’re in uncharted waters.”
Prime Minister Gordon Brown is trying to revive the economy to shore up his popularity in time for the next election, due by June 2010 at the latest. A Populus poll for the Times showed yesterday that the Labour Party trails the opposition Conservatives by 10 percentage points.
The number of people claiming jobless benefit, which is already at the highest since 1997, probably rose by 20,000 in October, according to the median forecast of 28 economists surveyed by Bloomberg News. The Office for National Statistics will publish the report at 9:30 a.m. today.
Clarke said that the Conservatives need to “work like mad” to avoid the prospect of a government which doesn’t win a majority of seats in Parliament after Britain’s next general election.
“At a time of national crisis, a hung Parliament would be one of the biggest disasters we could suffer,” Clarke said. “You’re going to need a strong government capable of doing unpopular things.”
To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Robert Hutton in London at rhutton1@bloomberg.net.
