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'We have to go further and faster,' says prime minister as Bank of England officials disagree over best strategy
David Cameron pledged to go "further and faster" in reducing the deficit after the UK was stripped of its coveted AAA credit rating.
The prime minister insisted that the one notch cut to the debt rating was a reason to press ahead with balancing the public finances, despite claims by the Labour leader, Ed Miliband, that the UK now had a "downgraded government, a downgraded chancellor and a downgraded prime minister".
Speaking at prime minister's questions, Cameron said : "I'm the one saying this credit rating does matter, and it demonstrates that we have to go further and faster on reducing the deficit."
The heated exchanges in parliament, where Miliband experienced one of his most awkward moments at PMQs when asked about the future of shadow chancellor Ed Balls, came after official figures reaffirmed that the economy had contracted by 0.3% in the final quarter of 2012.
Some economists pointed to upward revisions of previous quarters that showed that on some measures – excluding the impact of the volatile oil business – the economy escaped a double-dip recession following an uprating to 0% in the first quarter of 2012.
However, the economy only grew by 0.3% year-on-year, despite the boost from the Olympics.
Sluggish growth has sparked a debate about the role of monetary policy which resumed when Bank of England deputy governor Charlie Bean described negative interest rates as nothing more than "blue-sky thinking".
Bean was speaking the day after his fellow deputy Paul Tucker had floated the idea of the rates, which effectively charge high street banks for depositing money with the central bank.
This led to complaints over the possible impact on savers but Bean said that such policies would prove difficult to implement and were unjustified at the moment despite the economy's current woes.
This raised the prospect that Bank of England officials are at loggerheads over how to support the economy, demonstrated by the last meeting of the monetary policy committee meeting when three officials, including the governor Sir Mervyn King, voted to increase the level of quantitative easing (QE) by £25bn to £400bn. Other members, who have privately voiced concerns that QE has run out of steam, are known to back rival policies.
Across the Atlantic, US Federal Reserve chief Ben Bernanke also attacked the use of negative interest rates, which some countries have used to discourage high street banks keeping money on deposit with their central bank. He said: "It has significant negative side-effects which is why I do not support it."
In the Commons, Cameron taunted Miliband by saying that he would never sit on the government side of the House unless he accepted the need to cut borrowing.
Miliband was faced with an extremely awkward moment when he dismissed the New Statesman magazine – one of the few publications to endorse his leadership campaign – after Cameron quoted a recent article calling for Ed Balls to be sacked.
Reading from the article on 20 February by Anthony Seldon, the author of Brown at 10, the prime minister said: "Let's examine the fact that the New Statesman, the in-house magazine of the Labour party, says this: 'His critique of the government strategy will never win back public trust, his proposals for the economy will never convince, his credibility problem will only become magnified as the general election approaches.'"
He added: "That's not Conservative Central Office. That is the New Statesman."
Miliband then managed to offend one of his few media supporters when he replied: "With the greatest of respect to the New Statesman, he is scraping the barrel really by quoting the New Statesman."
Helen Lewis, the magazine's deputy editor, immediately tweeted: "Better to be talked about than not talked about, eh? #silverlining."
Sensing Miliband's discomfort, George Osborne leaned over to the prime minister, apparently passing on a piece of intelligence. Cameron then said: "He says the New Statesman is scraping the barrel. It was the only newspaper that endorsed his leadership. I have to say in this Oscar week perhaps the best we can say is Daniel Day-Lewis was utterly convincing as Abraham Lincoln and [Ed Miliband] is utterly convincing as Gordon Brown – more borrowing, more spending, more debt."