UK Economy: At Full Sprint but Barely out of the Blocks

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By Martin Baccardax | November 15, 2012 2:11 AM EST

Sebastian Coe prepares the final sprint past Steve Ovett to win the Moscow Olympics 1,500 metre gold in 1980.

Mervyn King loves sport, but the Bank of England Governor is never likely to be mistaken for the greatest middle distance runner of all-time.

My favourite athlete and boyhood idol, Sebastian Coe, once described the feeling of fear that gripped him just seconds before his greatest Olympic triumph.

Having passed arch-rival Steve Ovett on the final bend on the 1,500 metre final at the Moscow Games, Coe hit the accelerator, dug as deep as he could within his willowy nine-stone frame and sped for home.

"You've thrown everything at it. You'll hold it, you'll maintain it, but you ain't going to run a step faster. And I then knew that if Steve came at me, there was very little I could do to respond."

King had to be sharing Coe's sentiments as he prepared to face the media following the Bank's quarterly inflation report release in Lodnon.

The Bank's base lending rate hasn't been this low more than 300 years. It's bought more than £375bn in government bonds in an effort to press-gang the banks into lending more cash and risked its treasured - yet nascent - independence by singing up to the Funding for Lending scheme and agreeing to pass billions in bond interest payments back to George Osborne and the Treasury.

And the result of this historic monetary largess: an "unappealing" mix, according to the soon-to-be departing Governor, of faster inflation, slower growth alongside the potential of a "triple-dip" back into recession and the looming spectre of total meltdown in the crumbing Eurozone.

King and his Monetary Policy Committee colleagues are essentially sprinting full speed at this stage, only the main difference between the current Threadneedle Street dash and the double Olympic champion's is that King & Co. have only barely got off the starting line.

Britain blasted out of the recession blocks with the fastest quarterly growth in five years last month, but King has already warned us not to expect that kind of stride to continue, telling journalists Wednesday that there's a decent chance of more shrinkage given the clown show across the Channel and the global economic exasperation it has caused (I paraphrase).

Essentially, King told us, there's very little the MPC can do to respond if events outside the UK - where the bulk of the risks reside - flare up again.

"There are limits to the ability of domestic policy to stimulate private-sector demand as the economy adjusts to a new equilibrium," King said. "But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."

Well, here's the thing. Coe might not have "concluded" he couldn't run any faster as Ovett was breathing down his neck in the home straight, but he knew there wasn't much left in the tank.

King's efforts at "talking up" the power of the Bank's policy toolkit feels like a rather empty threat now that the Treasury has dipped its hands into the Asset Purchase Facility's accounts.

The fact that what Osborne and King did is both correct and sensible is moot. The fact that it underlined the absurdity of robbing Peter to pay Paul - with little more than a "it could have been worse if we didn't" endorsement from its masters - is not.

Besides, the Bank's starting to sound a tiny bit worried about the inflationary risks it's helped create with and the limits of its current tool box to mitigate them. Last month's inflation spike was policy-lead (in the form of a huge hike in University tuition fees) and next month's presumed acceleration will be market-lead (in the form of a huge increase in home energy prices).

Both numbers will feed into Office for National Statistics inflation calculations until at least December of next year, which is why the BoE now thinks CPI will peak at 2.6 percent sometime next autumn.

However, given the fact that neither inflation spike is linked to demand, higher base rates will have no impact whatsoever on their cost of living influence.

So we're limited in terms of what we can do to entice growth given the effort required to reach this rather plodding speed, limited in terms of what we can do to tame inflation, says everyone else given the nature of its origin and powerless to intervene in the Eurozone given that it's not our mess in the first place.

Strong, flexible labour markets, a weakening sterling that enhances export competitiveness and an improving fiscal outlook will likely support the potential for a recovery and prevent a prolonged slip back into recession but the message from King today seemed clear: we're flat out and there's not much left to us to do.

And we haven't even gotten through the first lap yet.

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