Mervyn King’s austerity assessment is music to the coalition’s ears

So the Bank of England has downgraded its central prognosis for UK growth by almost one percentage point in 2011 – from 3.4 per cent in May to about 2.5 per cent. And its central inflation forecast has nearly doubled for 2011 from 1.4 per cent to around 2.8 per cent.

So both main gauges of economic health going in the wrong direction: on the face of it a pretty disturbing verdict on economic developments since May, including of course the coalition’s emergency budget.

But the striking thing about Mervyn King today was his absolute unwillingness to countenance the idea that austerity had in itself created new risks for the economy. He rightly pointed out that the austerity impact on reducing growth had to balanced off against the positive impact of reducing the risk of a UK government debt crisis. However he suggested in today’s press conference that these two factors “broadly offset each other”.

This assessment will be music to the coalition treasury’s ears. But it’s also a big call at a time when many measures of business and consumer confidence are tanking. Chris Williamson, the man from Markit PMI, which runs the landmark business and consumer confidence survey, told me today about record falls in some of his confidence measures, attributing them directly to the emergency budget.

Against a backdrop of notable double dip caution from central banks around the world, the Bank of England’s stance is, as he argues, “relaxed”. Other economists point to the fact that the Bank’s charts show a marginal move from being more concerned about inflation towards being more concerned about growth and offering the possibility of further money printing.

So the big picture from the Bank of England inflation report is that there are concerns about growth, but Mervyn King went out of his way not to pin this on the austerity budget.

The bigger picture is that one sort of risk – a sovereign debt risk – has been swapped for another sort of risk to consumer confidence. The Bank has backed up the coalition’s view that the first risk was more dangerous and damaging than the latter. As I put to the governor himself, that is a judgement call.