LONDON (MNI) – While playing down the spectre of stagflation, the
Bank of England’s Chief Economist has admitted that storm clouds are
gathering over both the growth and inflation outlooks in the U.K.

“The near-term outlook for both growth and inflation has
deteriorated over the past couple of months,” Spencer Dale said in an
interview with the Independent published Thursday.

With his hawkish cap on, Dale said inflation is a stickier problem
than imagined, and tax changes in the recent budget will push back the
timing of a return to the central bank’s target level.

“Inflation has come out a little higher than expected, and the news
on VAT (value-added tax) in the June Budget means that the time it will
take inflation to get back to target will be pushed out, and I expect it
will be above target until the end of next year,” Dale said

However, acknowledging the dilemma the Bank’s Monetary Policy
Committee faces, Dales noted signs of a slowing economy, due in part to
the squeeze on government spending.

“There are some signs that growth may be softening, again partly
reflecting the June Budget. We’ve also seen tensions in the financial
markets increase, related to concerns about sovereign debt issues in
Europe.

“That has also affected the ability of banks and companies to raise
cash. There’s also the greater question of how things develop as
countries around the world accelerate their fiscal consolidation plans,”
he said.

The UK economy will not be back to normal “for an awfully long
time”, he said in the interview, adding that both his central view of
growth and his view of the downside risks to growth are weaker than
before.

However, Dale offered one note of optimism in his view of the
current state of the economy: the “very substantial” threat to growth
from a UK sovereign debt crisis appear to have “gone away”, for now at
least. According to Dale, the coalition government and officials have
done what they can to “mitigate” the risk of a debt crisis.

–London newsroom: 4420 7862 7492 e-mail: drobinson@marketnews.com

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