Bank of England Governor Mervyn King said Wednesday that he had concerns about how quickly the British economy may recover from the global financial crisis - and called for more government action to keep the country's "extraordinary" budget deficit under control.
King said that the "little evidence" that the bank had about the effect of its program to boost the money supply - begun through asset purchases three months ago - "seemed positive," but warned that a withdrawal of economic stimulus too early may create the risk of a renewed downturn.
He added that the international monetary system needed to be reformed to ensure a sustainable recovery and prevent a repeat of the crisis, noting that the recent fall in the British pound would only mitigate - rather than wholly offset - a weak world outlook.
King said he had "genuine concerns about how quickly the recovery will pick up," noting a "mixed picture" from different sectors of the economy.
"That factor and real uncertainty about the world economy does, I think, suggest that it's very difficult to be confident in a rapid recovery," King said while giving evidence to a cross-party committee of MPs on the bank's May inflation report.
"A wise person would not want to put their bets on the precise path of recovery at this point," he added. "We'll know a lot more over the next year."
Still, King said that one of the reasons for thinking that Britain could recover "slightly earlier" than other countries was the beneficial impact from the weaker exchange rate.
The pound weakened further as King spoke, slipping to around $US1.6485, from around $US1.656 shortly before he began his testimony.
IHS Global Insight economist Howard Archer said the comments by King and his fellow policymakers indicated they retained serious doubts about the strength and sustainability of any recovery, despite recent improved data on economic activity. That suggests that interest rates will remain at the current record low 0.5 per cent through the rest of this year and may continue at that level well into 2010, Archer said.
King said that the Bank of England has bought 96 billion pounds of securities so far under its quantitative easing program, which seeks to boost lending by increasing the amount of money in the economy.
The bank's monetary policy committee voted at its rate-setting meeting earlier this month to keep the size of the program and 125 billion pounds and said it expected to complete the planned asset purchases around early August.
King said the increase in the money holdings of financial institutions that have sold assets to the bank should lead to a rebalancing of portfolios, pushing up on other asset prices and passing on the additional money to others, "both of which might result in higher spending on goods and services."
However, King also sent another shot across the government's bows, saying that more action needed to be taken to address the country's "extraordinary" budget deficit.
Under Treasury chief Alistair Darling's forecasts, set out in the April budget, it will take until 2013-14 to bring the country's current account deficit - the difference between tax revenues and expenditure - down to 5.5 per cent.
King said the government has not been clear enough on its path for reducing the hefty deficit, saying that the size of the borrowing was not sustainable even without the current crisis.
"If the economy does recover along the path assumed as the central path of the budget, then I think to end up in 2014 with a deficit of 5.5 per cent of GDP is an awfully long time to demonstrate that we are going to bring down deficits," King said.
King's comments were taken as further evidence of a rift between Treasury and the central bank, coming just a week after King and Darling were at odds over banking regulation while giving speeches at the same event.
King told last week's annual dinner in the financial district that the central bank should have more authority to intervene in the actions of banks seen to be behaving riskily. Shortly afterward, Darling told the same gathering he had no plans to fundamentally change the system of regulation.
King has also criticised the government's running of the economy before, suggesting in the leadup to the April budget that Darling had little room to make fresh fiscal stimulus because of the size of the deficit.
King tried to downplay the differences, telling MPs on Wednesday that he had a "good working relationship" with Darling.
In response to questions about a growing discussion about whether government, the Financial Services Authority or the bank should be responsible for new regulation arising from the crisis, King said the bank had no desire to get into a "turf war."
AP