King in no hurry to cut interest rates

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - Bank of England Governor Mervyn King appeared in no hurry on Thursday to cut interest rates despite mounting evidence the British economy is on the verge of its first recession since the early 1990s slump.

He will, however, publish next week plans for a new liquidity facility to help cash-strapped banks through the credit crunch though any proposals for the authorities to underwrite new mortgage lending are likely to get short shrift.

But King told parliament's Treasury Committee the outlook for growth had worsened but inflation had risen at the same time and could yet force wages higher in the new year pay round.

Sitting a few feet away from him, however, arch Monetary Policy Committee dove David Blanchflower renewed his call for aggressive cuts in interest rates, predicting that higher wages would not be a problem because unemployment would rise significantly.

King said interest rates had stayed at 5 percent for the last few months precisely because the central bank needed to show its determination to get inflation, currently 4.4 percent and expected to go higher, back to the 2 percent target.

"I can't tell you a great deal of what will happen in the next wage round and settlement because we haven't got the facts yet. Basically the higher inflation we've been talking about in prospect, we haven't experienced yet," King said.

"It's just a little premature to say you can just ignore the potential impact."

Certainly, consumers are already cutting back. John Lewis, seen as a bellwether for the retail industry, posted a 27 percent drop in first-half profit and said it was cautious about the outlook for the rest of this year and 2009.