Mervyn King says UK recovery will be long and arduous
Bank of England governor Sir Mervyn King has said the path to economic recovery in the UK will be long, arduous and uneven.
"After many years in which the stock of debt built up rapidly, there has been a reappraisal," he said in a speech.
Sir Mervyn said falling inflation and subdued wage growth nevertheless gave the bank more scope to act.
"There is scope for interest rates to remain low, and, if necessary, for further asset purchases," he added.
Official figures released last week showed that the Consumer Prices Index (CPI) measure of inflation in the UK fell to 4.2% in December, down from 4.8% in November.
Speaking in Brighton, Sir Mervyn explained that low growth in the UK economy was not only due to inflation but also down to households tightening their belts because of worries about jobs and future income.
"Households as a whole have been net savers, rather than net borrowers, for each of the past three years," he said.
Sir Mervyn said the UK economy was operating within a "global slowdown" and rebalancing both the world economy, and the UK economy within it, "is not proving to be a smooth process."
Separately the IMF released a report on Tuesday which cut its growth forecast for the global economy to 3.25% in 2012, down from an earlier forecast of 4%.
The IMF described the world's economy as "deeply into the danger zone" because of risks from the eurozone.
The eurozone is set for a "mild recession" in 2012, with GDP expected to shrink by 0.5%, compared with a previous forecast of 1.1% growth, according to the IMF report.
Sir Mervyn called for the UK to rebalance its economy to reduce its borrowing.
"The United Kingdom is still borrowing from the rest of the world. If, as a nation, we are to reduce that borrowing, we must export more and import less," he said.
He pointed to the fact that net exports have improved by two percentage points of GDP since 2007 as a sign of progress.
However he also said this was at least partly due to a 25% fall in the value of the pound against other currencies.
On Monday, Business Secretary Vince Cable announced steps to curb high boardroom pay.
Sir Mervyn called for companies to consider carefully before awarding pay for their executives, arguing that it could undermine the basis of the market economy.
"Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair," he said.
"That sense of fairness underpins the commitment to a market economy."
Sir Mervyn also warned that excessive pay, especially in firms that had received a government bailout would have far-reaching effects.
"The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers."
Meanwhile, BBC Business editor Robert Peston reported that the Treasury department is putting pressure on the board of state-owned Royal Bank of Scotland (RBS) to reduce chief executive Stephen Hester's pay to less than half of the £2m he was awarded last year.
The RBS remuneration committee meets to decide pay awards for its executives on Wednesday.