Inflation is forecast to remain above the central bank's 2% target until at least the end of 2015 – peaking at 3.2% later this year
Britain will suffer low growth and a squeeze on average incomes for at least another two years, the Bank of England warned on Wednesday, signalling that the economy will remain weak until the next election.
The Bank's governor, Sir Mervyn King, put the institution on a collision course with the Treasury after he blamed the government for pushing inflation above its 2% target for the fourth consecutive year and warned that growth in the economy would not gain momentum until 2015.
King accused the chancellor, George Osborne, of scoring "an own goal" following steep rises in university tuition fees and hikes in energy bills linked to green subsidies, which pushed up inflation by at least one percentage point.
The outgoing governor said inflation would be higher than expected as a result of "administrative decisions" and made the monetary policy committee's job of hitting the 2% benchmark much harder.
Treasury sources said it was unfair of the governor to blame the government when it had made every effort to limit price rises in key areas, including freezing fuel duty and council tax.
King made his comments as he delivered the bank's quarterly inflation report, which predicted inflation would remain above the central bank's 2% target until at least the end of 2015, peaking at 3.2% in the second half of this year, from 2.7% currently. With wage rises regularly averaging less than 2%, household incomes are likely to remain under pressure. The economy will regain the size it last achieved in 2007 as growth is not expected to get above 1% this year.
Sterling tumbled on the gloomy outlook and the prospect that the Bank's monetary policy committee, ignoring recent good news from higher construction output, will inject more funds into the economy through quantative easing – where the Bank enters the market to buy UK government debt. The pound fell to $1.55, down a cent on the previous day.
Lord Oakeshott, a former Liberal Democrat Treasury spokesman, said King's intervention amounted to an attack on the government's economic strategy.
"The governor is blaming the chancellor for pushing up prices and blowing the MPC off course, which is unprecedentedly direct criticism of the government by a serving governor."
King insisted a "recovery is in sight", but warned the path ahead for the UK economy would not be smooth, in part because there were limits to what more economic stimulus could achieve.
Nevertheless, he said, the central bank remained ready to do more to help the economy if needed.
"We must recognise there are limits to what can be achieved via general monetary stimulus – in any form – on its own," he said.
Business leaders responded to the inflation report with demands that Osborne, who is preparing his March budget, boost infrastructure spending to generate high quality jobs and spur growth.
The Confederation of British Industry, which represents thousands of the UK's biggest private sector employers, warned that without a push from the Treasury the economy would continue to crawl out of recession.
CBI boss John Cridland said: "We've called for the government to boost capital spending by digging a bit deeper on current expenditure, and to get investment spending flowing in the short term, for example on much-needed repair and maintenance of the roads system."
Labour said the prospect of low growth and falling real wages at least until the next general election showed the government's economic policies had failed.
Official figures showed that low wages and high inflation over recent years have badly hit household incomes. The Office for National Statistics said the real value of average earnings has fallen back to 2003 levels after 30 years of strong growth. It said new research had revealed average earnings peaked in 2009, but since then wage increases had been outstripped by inflation. Wage growth is currently running at 1.8% a year, though some areas of the economy remain buoyant.
The ONS said the economy was no larger than it was in 2005 after growth, which began to rise in the latter part of 2009 and the first half of 2010, flat-lined.
King said the MPC was committed to "looking through" the current high inflation because some of the rise came from one-off factors, such as the near trebling in university tuition fees, and the risk that higher interest rates would crash the economy and push inflation below its target.
"Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term," he said.
The bank has spent £375bn on buying government bonds but has held off from increasing the programme. The incoming governor, Mark Carney, hinted last week he may press for the bank to be more aggressive in attempts to boost growth.Bank of EnglandEconomic growth (GDP)EconomicsEconomic policyInflationPhillip Inmanguardian.co.uk