The Governor of the Bank of England, Sir Edward George, has warned about the problems of the UK econ...
The Governor of the Bank of England, Sir Edward George, has warned about the problems of the UK economy in a speech at the Association of Business Community Dinner in Scotland on Monday.
Despite being the strongest economy in Europe, with low unemployment and low inflation, the Governor expressed concern on the internationally exposed sectors of the economy. He says: "Once you look beneath the apparent benign surface of the economy as a whole, you find very substantial differences between many internationally exposed businesses, particularly in manufacturing but including farming and some services businesses, which have been having a very tough time recently, and businesses serving the domestic market which have been doing relatively well."
He attributes the reasons for this to the weakness of the euro both against sterling and the dollar as well as the slowdown in demand in major industrial economies. The Governor also mentions that because these two factors are out of the control of the Bank of England, the only tool of the BOE remains interest rates. However he also points out that monetary policy is not a straightforward tool and that despite interest rate cuts the euro still remains weak against the dollar and fairly weak against the pound.
Monetary policy impacts on the economy in two major ways. First, it depreciates the exchange rate so that the pound is not too strong in the international market, secondly, it fuels domestic demand. The latter was seen in 2001 with a surge in the demand for houses in the UK. These measures, the Governor said, were desperate ones which were used to avoid recession. However, he also pointed out that the measures failed to stimulate demand in internationally exposed areas such as manufacturing.
"So in effect we have taken the view that unbalanced growth in our present situation is better than no growth - or as some commentators have put it, a two speed economy is better than a no-speed economy," the Governor said.
Now that the US and Europe are bottoming out, the Governor said the UK can look forward to being a 'better balanced economy'. When it comes to consumer demand, the Governor said that the BOE expects consumer demand to diminish by its own accord. If this does not happen then the BOE will intervene. However, this is not expected to happen until the global economies clearly show signs of picking up.
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