Credit crunch: Forget the 'nice' times, the message now is grin and bear it

Credit crunch: Forget the 'nice' times, the message now is grin and bear it

Indeed, the IMF's health check on the UK only served to underline what Darling and King have been saying for some time. The combination of a credit crunch, a deflating housing bubble and spiralling food and energy prices means that the outlook for growth is much lower and inflation higher than the Treasury was forecasting in the spring budget. For the first time since it was elected in May 1997 Labour is beset by the sort of tough economic climate that was part of everyday life for Harold Wilson and Jim Callaghan in the 1960s and 1970s. For the first time since it was granted operational independence five days after Tony Blair's first landslide victory, the credibility of the Bank of England is at stake when it meets to decide interest rates today.

Creating the nine-strong monetary policy committee (MPC), and ceding to it the power to set the cost of borrowing, was seen as a masterstroke by Gordon Brown and for 10 years the liberated Bank had it easy. It was, as King put it, a "nice" decade of "non-inflationary continual expansion" in which globalisation helped keep prices low and output.....continued below

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When the MPC met in August 2007, days before the credit crisis began, it spoke with one voice. All nine members said the rate should be left at 5.75% following five quarter-point increases, but the City was put on alert for further rises should the economy fail to slow. There was a reference to market tremors but nothing to suggest that August 9 2007 would end the recovery that began for the UK on September 16 1992.

Life has moved on. With the economy facing the twin perils of recession and inflation, last month's MPC meeting showed it was split three ways. One member, David Blanchflower, said lower rates were necessary to prevent Britain following the US into a housing market-led downturn. Blanchflower has been a lone voice on the MPC in recent months, but he is supported by economists who believe that higher food and fuel prices will ultimately prove deflationary rather than inflationary because of their impact on consumer spending power.

A former MPC member, Sushil Wadhwani, criticised the Bank yesterday for failing to "lean against the wind" when the housing market was booming out of control and for now failing to provide a parachute when the economy was coming rapidly back to earth.