Highlights of the August Inflation Report

LONDON (Reuters) - The Bank of England published its quarterly inflation forecasts on Wednesday against a backdrop of sharply rising price pressures and a slowing economy.

Below are highlights of a news conference on the report given by Governor Mervyn King and other policymakers.

To see King’s opening statement please click on:




“Libor rates will probably stay relatively high relative to the policy rate for some time. Financial markets are expecting them to edge down over the next year or so. This is precisely the backdrop to the adjustment we are seeing in bank balance sheets.”



“It’s the riskier borrowers who are finding it more expensive... that’s where the credit crunch is hitting. It hasn’t had an enormous impact on those people who are much safer borrowers. That’s what you would expect. We are moving from the imprudent period of excessive lending back to a period now of much more cautious lending.

“That is reinforced by the need of banks to scale back the growth of their balance sheets given constraints on their capital.”



“It is plausible to expect the underlying rate of growth of potential to be somewhat lower over the next few years and we have in fact made that assumption in the projections we have published today.”



“It’s hard to judge where prices may go. It may occur as much as from the passage of time as earnings rise from the continued falls in house prices. But I don’t think anyone can judge how far it will go.

“We are in a period where prices are adjusting to new levels. Both buyers and seller are struggling to find out what that new level is. The market will determine it, not us or the government. Once we have reached that level then prices should normalise. But that does not mean back to levels seen early last year, that was clearly excessive.”


“What we have seen in the past year or so is the culmination of a very large rise in energy and commodity prices, such that oil prices are at the highest level in real terms at any point in the post-war period apart from the late 1970s ... and also we’ve seen the biggest financial dislocation since the Second World War.

What is unique about the present circumstances is that both shocks have occurred at the same time. The combination of those two shocks, which have originated primarily in the rest of the world economy, have meant that life is extremely difficult and will be for the UK economy over the next year. It doesn’t mean to say that it will go on for ever, it won’t. We say here we’ll see slow growth, broadly flat output for around a year and then growth will resume.”


“There are good reasons to suppose that this rise in inflation will be temporary and it will fall back and we will take the measures to ensure it does fall back.”


“We are clearly seeing a significant adjustment to house prices.”


“Further ahead, as food and commodity prices stabilise, the growth rate of real take home pay should recover and that together with some easing in credit supply conditions and a pick up in exports following the fall in sterling’s effective exchange rate should support a recovery in output.”


“A more pronounced slowdown in activity is likely to be necessary to contain wage and price pressures and ensure that inflation expectations are anchored in the medium term.”

“The MPC continues to face a balancing act between these upside risks and the downside risks that a more prolonged slowdown could put inflation well below target in the medium term.”


“I think with broadly flat output, it’s bound to be the case that there is a possibility of a quarter or two of negative growth.”


“Both consumer spending and house prices are likely to weaken together. In addition the continued adjustment of banks’ balance sheets has resulted in a monetary squeeze and tighter credit conditions, as shown by the sharp contraction of underlying money and credit growth.

“The impact of this is very clear in residential and commercial property markets where activity has slowed as prices have fallen. Surveys have suggested that housing price indicators point to a substantial slowdown.”


“The adjustment of the UK economy to higher commodity prices and a more realistic pricing of credit will be painful. The next year will be a difficult one.”


“The current period of above-target inflation, although very marked, will be temporary and inflation will return to the 2 percent target.”

“It may still just be summer but there is a feeling of chill in the economic air. The British economy is going through a difficult and painful adjustment due to higher energy and commodity prices and in banking, credit and housig markets. This adjustment to our economy cannot be avoided and as a result, inflation is rising and growth is slowing.”

“Inflation is likely to rise further this year and to peak at around 5 percent in the coming months.”