Warning over rising recession risk

Warning over rising recession risk

Bank of England deputy governor Sir John Gieve has said a recession could not be ruled out and warned that the risks had risen in the past two months.

He said in a speech at the London Stock Exchange that the chance of the UK falling into recession had "somewhat increased" since May.

The outgoing deputy governor outlined an "uncomfortable" year of soaring inflation, slowing growth and rising unemployment.

The Bank expects rocketing fuel, food and commodity prices to see inflation remain "well above" 4% for the rest of the year, with inflation risks increasing each month, he added.

Official figures showed that Consumer Prices Index (CPI) inflation hit 3.8% in June - a far greater rise than expected by the Bank and wider market.

The Bank's Monetary Policy Committee voted to keep rates on hold at 5% last week for the second month, but Sir John said that policymakers would do "whatever it takes" to bring inflation back to the 2% target.

"These are troubled times for both the City and the economy more widely," he said.

"The MPC will continue to assess the balance between the risks of higher inflation from the commodity cost shock and the downside risks to output - and to inflation in the medium term - from the credit crunch," he added.

While concerns over mortgage funding had eased a little since March, he said the tightening in credit conditions had offset the Bank's three rate cuts since last summer and cautioned the squeeze was set to get worse.

Falling house prices were also starting to hit consumer confidence, reducing consumption and investment, according to Sir John. "Most importantly, the sharp increases in commodity prices are squeezing real take-home pay, which is bound to have an impact on consumption at some point," he said.