Brown Sees Higher Commodity Prices Cooling U.K. Economic Growth
Prime Minister Gordon Brown said rising energy and food costs will limit growth in the U.K.
“If you've got a 60 to 80 percent growth in oil, coal and gas prices, it's bound to affect the rest of the economy,'' Brown told the BBC's The Politics Show. “The issue for us is actually, that we can maintain stability and growth, over what is basically turbulent times for the world economy.''
Crude oil futures touched a record $100.09 a barrel on Jan. 3 while international coal prices reached an all-time high last year. U.K. growth was the slowest in more than a year in the fourth quarter after contagion from the U.S. subprime mortgage crisis fueled a jump in market credit costs.
Brown said that as growth cools from last year's rate of 3.1 percent, keeping a lid on pay increases is important for controlling inflation. Bank of England Governor Mervyn King said Jan. 22 rising energy costs and slower growth pose a “difficult balancing act'' for policy makers, who left the main rate at 5.5 percent this month to guard against rising consumer prices.
“We had to make difficult public sector pay decisions, but the economy depends on being able to cut interest rates, through having low inflation,'' Brown said. “At the moment, inflation is 2.1 percent, in America it's 4 percent, in the euro area it's 3 percent, so it has been an achievement to get inflation down.''
Global Effect
“With low inflation, with low interest rates, we expect the economy to be more stable and growing, but undoubtedly, we are affected by what's happening in the rest of the world,'' he said.
Global stock markets fell the most since 2001 and the U.S. Federal Reserve cut interest rates by 75 basis points last week on mounting concern about a recession in the world's largest economy.
A U.K. housing boom that underpinned consumer spending has stalled as the U.S. mortgage crisis made banks reluctant to lend to one another, limiting the availability of loans for house purchase and keeping borrowing costs from falling payday loans online.
The central bank may have limited scope to cut rates. King said inflation may rise above 3 percent this year, matching the fastest pace in a decade and requiring him to write a letter of explanation to the government. The U.K. central bank's benchmark interest rate is higher than that of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan or the Bank of Canada.
Brown said U.K. economic growth will depend on demand at home and abroad.
`Moving Forward'
`The engines of growth include what we've had over the last period of time, rising investment and rising exports, as well as consumer expenditure,'' he said. “The important thing to remember is that we want, by having low inflation and low interest rates, to keep the economy moving forward.''
Brown said his government's efforts to limit contagion from turmoil in the U.S., including its steps to stop a run on deposits at Newcastle, England-based mortgage lender Northern Rock Plc last year, are done in order to protect growth and ensure stability.
“It's essentially a financial system problem that is affecting the rest of the economy and our aim throughout has been to try and protect and insulate as much of the economy from it as possible,'' he said. “That's of course why we acted in relation to Northern Rock, in the way we did, to prevent the problems of Northern Rock spreading.''
A panel of U.K. lawmakers said in a report yesterday that the country's banking regulator, the Financial Services Authority, failed in its supervision of Northern Rock, and the Bank of England should have done more to soothe money markets before a run on the lender. The panel put less blame on the Treasury for the panic, the first in 140 years.