Bank can support economy as cuts bite – Cameron

Monday, 4 October 2010 21:46 - - {{hitsCtrl.values.hits}}

(Reuters) - The Bank of England can support the economy as Britain cuts a record budget deficit, Prime Minister David Cameron said, after a senior government minister warned of the risk of another recession.

There are signs that the economy -- along with other major economies -- is slowing after bouncing back strongly from the financial crisis.

At the same time, many countries including Britain are making drastic government spending cuts to deal with bloated budget deficits. Some analysts and policymakers argue such cuts could create problems if the global economy slows rapidly.

"The right stance was to deal with the deficit -- the problem facing Britain -- and at the same time that allows the Bank of England to keep monetary policy and interest rates relatively expansionary," Cameron said in a BBC interview.

Cameron's justice minister Kenneth Clarke, who was Chancellor when the Conservatives were last in power, warned that Britain could succumb to a double-dip recession, although he put the chances of such an outcome at below 50 percent.

"I'm at the more pessimistic end," he told the Observer. "I'm not sunnily optimistic about where the Western economy is going ... I do not rule out the risk of a double-dip recession caused by some fresh wave of global fear and crisis."

The Conservative-led coalition plans to cut spending by around 25 percent across most government departments to slash a budget deficit running at 11 percent of national output.

The deficit reduction plan has calmed market jitters over Britain's debt levels, helping to drive government bond yields to record lows in recent weeks, but some are now suggesting further monetary policy action may be needed to support growth.

This week, Bank policymaker Adam Posen called for more quantitative easing -- buying government bonds with newly-created cash -- to stop the economy sliding into the kind of prolonged slump Japan went through in the 1990s.

The central bank has already slashed interest rates to a record low of 0.5 percent and spent 200 billion pounds ($316.3 billion) of new money on assets to get the economy back on its feet.

There has been little sign so far the government is willing to scale back its austerity drive if the economy slows. It argues that the central bank and private sector will take the strain.

Cameron said his government would "have to react to the circumstances."

"It will be choppy period," he said.