Bank of England chief Mervyn King: Standard of living to plunge at fastest rate since 1920s

Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.

Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.

With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.

Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.

But there were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”.

Mr King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and “those who behaved prudently” would be among the biggest losers in the squeeze, he admitted.

The governor warned that the Bank “neither can, nor should try to, prevent the squeeze in living standards”.

He said that the economic figures were a reminder that the recovery will be “choppy”. However, he said the biggest threat facing the Bank’s Monetary Policy Committee, which sets interest rates, was rising inflation.

Mr King insisted that the Monetary Policy Committee could not have increased interest rates from their current record low level to tackle the rise in inflation.

“The erosion of living standards would have been even greater. The idea that the MPC could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking.”

Mr King expressed sympathy for savers and highlighted the failure of lenders to pass on cuts in interest rates. “I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis,” he said. “But a return to economic stability from our fragile condition will require careful and well-judged steps looking beyond the next few months.”

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