Bank of England Governor Mervyn King appeared in no hurry on Thursday to cut interest rates despite mounting evidence the British economy is on the verge of its first recession since the early 1990s slump.
He will, however, publish next week plans for a new liquidity facility to help cash-strapped banks through the credit crunch though any proposals for the authorities to underwrite new mortgage lending are likely to get short shrift.
But King told parliament's Treasury Committee the outlook for growth had worsened but inflation had risen at the same time and could yet force wages higher in the new year pay round.
Sitting a few feet away from him, however, arch Monetary Policy Committee dove David Blanchflower renewed his call for aggressive cuts in interest rates, predicting that higher wages would not be a problem because unemployment would rise significantly.
King said interest rates had stayed at 5% for the last few months precisely because the central bank needed to show its determination to get inflation, currently 4.4% and expected to go higher, back to the 2% target.
"I can't tell you a great deal of what will happen in the next wage round and settlement because we haven't got the facts yet. Basically the higher inflation we've been talking about in prospect, we haven't experienced yet," King said.
"It's just a little premature to say you can just ignore the potential impact."
Certainly, consumers are already cutting back. John Lewis, seen as a bellwether for Britain's retail industry, posted a 27% drop in first-half profit and said it was cautious about the outlook for the rest of this year and 2009.
Blanchflower said it would not be surprising to see the jobless figures post rises of more than 60,000 a month soon.
Sterling, already down sharply in the last few weeks, fell further to hit a 2-1/2 year low against the dollar on his warning.
GOD ONLY KNOWS
King said he did not have the benefit of "the Almighty" telling him what the next jobless figures would be but the central bank had to ensure higher inflation expectations did not become entrenched.
BoE data earlier on Thursday showed people's expectation of inflation in the next 12 months had risen to a series-high of 4.4%.
The weakness of sterling is also adding to inflationary pressures, BoE deputy governor Charles Bean told the committee, even if it should also help boost the economy next year.
The immediate economic outlook, however, was bleak, said Bean, repeating the BoE's August forecast there would be no growth for around a year.
The British economy failed to grow for the first time since the early 1990s in the second quarter and many analysts say things could soon get even worse.
A Reuters poll of economists published on Thursday put the chances of recession at 55%, up 10%age points on a month ago.
King said he did not find the concept of recession as particularly useful as it seemed arbitrary but he warned finance minister Alistair Darling not to try and spend his way out of the current downturn.
The revenue forecasts were now looking optimistic given the slowdown in the economy and the government had been running a deficit for some time.
"In order to get to a sustainable medium-term path for the public finances, these two issues need to be confronted," King said. Loss of fiscal credibility could push up inflation expectations and make the central bank's job harder as a result.
King also warned against the government intervening in the mortgage market by underwriting new loans in a bid to revive the faltering housig market.
The government-sponsored Crosby report, which will make recommendations on what can be done to ease mortgage market conditions, is expected in the coming weeks.
