Bank of England chief warns of 'choppy' economic recovery

Bank of England boss Mervyn King warns that grim GDP figures serve as a stark reminder of Britain's "choppy" economic recovery and says Britons should expect "uncomfortably high" levels of inflation.

Following yesterday's figures which showed Britain's economy shrank by a shock 0.5 per cent in the final three months of 2010, Mervyn King braced consumers for a bleak financial year.

The Bank Governor said the UK economy was "well placed to return to sustained, balanced growth", but difficult times lay ahead in 2011.

In a speech at Newcastle's Civic Centre last night, the Bank Governor said inflation would rise to "uncomfortable high" levels this year, with a peak of between 4 per cent and 5 per cent over the next few months. Next year inflation would then fall back "quite sharply", Mr King said.

Gross domestic product (GDP) contracted in the in final quarter of 2010, which stoked fears Britain could be heading for a double-dip recession as deep spending cuts are introduced by the government's austerity measures.

It also raises the prospect of stagflation - a period of high inflation coinciding with a stagnating economy.

Last night, Mr King warned that real wages will plunge back to 2005 levels as prices soar and the Government's deficit-busting actions take effect.

Rising unemployment and declines in real earnings will hit spending in the private sector, with the public sector hammered by Government spending cuts.

The Governor said the latest GDP figures "remind us that, as I said last year, the recovery will be choppy.

"Of more immediate concern to the Monetary Policy Committee is that we are experiencing a period of uncomfortably high inflation."

He added: "With the standard rate of VAT rising to 20 per cent this month, and recent further increases in world commodity and energy prices, inflation is likely to rise to somewhere between 4 per cent and 5 per cent over the next few months, before falling back next year."

Despite the warning Mr King appeared to downplay the changes of the Bank of England raising interest rates any time soon.

The Organisation for Economic Co-operation and Development (OECD) backed the Government's economic approach and cuts package today.

Secretary General Angel Gurria told BBC Radio 4's Today programme: "They should stay the course. The package was an ambitious package, which was what was necessary. The fiscal situation of the UK absolutely requires this approach.

"Without it, there will be no medium or long-term growth."

Source: http://www.channel4.com