The Bank of England's governor Mervyn King yesterday sought to calm fears that Britain's consumer-driven economy could be heading into stagnation as home-owners stop cashing in on the inflated value of their houses.
Weakness in household spending has become more marked and persistent than the Bank has expected, he said. He accepted that the slowdown in retail spending was more than an erratic movement and confessed he was puzzled by the sharp drop in purchasers of consumer durables.
But Mr King then insisted that the Bank's interestsetting Monetary Policy Committee expects household spending will start growing again.
"Profit warnings from a number of retailers, business survey, reports from the high street and the official data on retail sales all point to an easing of consumer spending," Mr King said.
But then he added: "The committee's central view is for household spending growth to recover, but to remain below the average of recent years."
Mr King was presenting the Bank's latest quarterly Inflation Report. This shows a slightly weaker projection for growth than in February, particularly in the next few months, and a rather stronger one for inflation.
Both scenarios are based on the assumption that the City's money markets are right in expecting interest rates to stay pretty well unchanged.
Mr King stressed the risks to these projections. These were now evenly balanced , he said, while in November those for inflation were mainly on the downside. Growth was slightly more likely to be over-stated .
He rejected a suggestion that Britain could be returning to the "stagflation" of the 1970s, when high interest rates imposed to check inflation brought the economy to a standstill.
These projections, he declared, "are about as far away from stagflation as you can get".
And he added: "You need to get a new dictionary."
He was more measured when asked how the Bank's projection for growth dipping to around 2.5 per cent this summer then rising very gradually squared with the three per cent on which Chancellor Gordon Brown based his March Budget. A half-point difference was nothing to worry about, he said.
In the City markets, Government stocks and interest rate futures surged as dealers, many of whom had been predicted an interest rate increase this summer only a month ago, wondered if the next move might be down.
"If the economic data maintains its recent softer note, we argue the next move in rates will be lower, and retain our view of an August rate cut," commented Ciaran Barr, UK economist at Deutsche Bank.
Mr King said that a slower rise disposable incomes and moderate house price inflation could explain some of the slowdown in consumer spending, the sharp fall in retail sales fall at Christmas and the lack of a recovery afterwards was a different matter.