LONDON (Dow Jones)--The economic outlook for the U.K. foreseen by the Bank of England's Monetary Policy Committee is "benign," the central bank governor said Wednesday.
Speaking at a press conference on the bank's quarterly inflation report, Bank of England governor Mervyn King said the slowing of consumer spending growth that began in the middle of 2004 "appears to have been relatively short-lived."
That slowing of consumer spending led to a wider slowdown in economic growth, with gross domestic product having expanded just 1.8% in 2005, its weakest performance since 1992.
"The outlook described in today's report contains a benign central view of steady growth with inflation remaining close to target over the forecast period," King said.
In its inflation report, the MPC forecast that economic growth will pick up to around its 2.75% trend rate by the middle of this year, and move above trend in early 2007 before falling back slightly.
King said consumer spending will grow at around trend during the next two years, while the U.K.'s trade deficit will be less of a drag on growth.
"The central view is that consumer spending is likely to grow at around its long-run average rate...business investment will recover slowly and net trade is likely to make less of a negative contribution to output growth," King said.
King said the impact of high energy prices on the inflation rate is likely to "unwind" during the next two years, but added that there is "particular uncertainty about the future path of domestic gas prices."
The governor said there are "some differences of view" among the MPC's nine members on the outlook for inflation and growth.
In its report, the MPC said the main risk to its growth forecast is to the downside, and King said if growth were slower than expected, the inflation rate might also be lower.
"In the committee's view, the balance of risks to the path of demand is slightly to the downside, associated with the outlook for consumer spending and net trade, which poses downside risks to inflation," he said.
However, he added that the MPC also sees upside risks to its inflation forecasts arising from the "possible impact of energy prices and the uncertainties about the extent of spare capacity in the economy at present," King said.
The MPC has been puzzled by the subdued increase in business investment in recent years, given the high level of profitability and the low level of interest rates.
"We had expected business investment to recover more quickly by now," King said.
The official statistics agency recently indicated that it will raise its historical estimates of business spending on computer software, and that is likely to lead to higher measured rates of investment going forward.
But King said revision is "unlikely to have an impact on (the MPC's) perception of growth rates."
The Office for National Statistics Tuesday revised down its estimate of the inflation rate in December to 1.9% from 2.0%. But King said that revision would have a "trivial" impact on the outlook for inflation and was "a purely technical issue."
The MPC last raised interest rates in August 2004, while its last move was an interest rate cut to 4.5% from 4.75% in August.
However, most other leading central banks have been raising interest rates in recent months, with the U.S. Federal Reserve having this month hiked for the 14th time in two years while the European Central Bank raised rates in December.
King said the fact that other central banks are raising rates didn't concern the MPC.
"There's no particular reason to be concerned by that," said King, noting that the MPC's task is to set interest rates with an eye on its 2.0% inflation target.
King said the MPC hadn't yet seen evidence of second-round effects from the rise in energy prices during the last three years.
In common with other central bankers, the MPC fears that workers will seek higher wages to compensate for higher energy prices, thus setting off an inflationary spiral.
"We've not seen evidence of significant second-round effects that would worry us," King said.
However, he added that it is too early to conclude that second-round effects won't come through, because the MPC has yet to see final evidence from the round of wage negotiations that began at the start of the year.
"I certainly don't want to conclude that they won't," King said. "So far, so good."
King said there is still a need for a rebalancing in the U.K. economy toward a greater reliance on exports and business investment for its growth momentum, and less reliance on consumer spending.
"We have not seen as much of that as we might have thought," King said.
He noted that the U.K.'s trade deficit was 3.8% of gross domestic product in 2005, a level that is still below that of the U.S., but a problem that is "not trivial."
However, King added that there is not much the MPC can do to help rebalance the economy given that its sole policy tool is the interest rate.
-Paul Hannon and Andrew Peaple, Dow Jones Newswires, +44 7842 9491, email@example.com
(END) Dow Jones Newswires