Bank of England cuts growth forecast close to zero

Thu, Aug 9, 2012, 01:00

THE BANK of England yesterday signalled that the UK’s economic recovery would be slower and weaker than it has anticipated at any point since the financial crisis ignited in 2008, and left the door open for an easing of monetary policy in the autumn.

Unveiling its latest inflation report, the central bank’s Monetary Policy Committee said the economy in two years’ time would be growing at about 2.1 per cent a year – below the UK’s long-term trend rate and much lower than the bank’s 2.6 per cent prediction three months ago.

The forecast is the lowest for medium-term growth made by the committee since its creation in 1997, and economists said it underscored a change in the bank’s analysis of the economy.

“This is a pretty big shift,” said Jens Larsen, economist at Royal Bank of Canada. “I don’t recall a forecast where we don’t return to trend at the end of the period. They are saying that monetary policy is not enough to bring growth back to its trend rate.”

Sir Mervyn King, Bank of England governor, said the MPC “will do all it can” to bring about recovery, and he left the door open both to purchases of gilts – known as quantitative easing – beyond the current £375 billion programme, as well as the possibility of a cut in the 0.5 per cent base rate. Sir Mervyn questioned whether a rate cut would make much difference. “It’s going to be more counterproductive than not at this point.”

The bank lowered its growth forecast this year from about 0.7 per cent to roughly flat, reflecting the fact the economy has contracted for three quarters.

However, Sir Mervyn cast doubts on official data showing a sharp fall in UK GDP in the second quarter, noting distorting factors.

“The big picture is that output has been flat,” he said, pointing to uncertainty about the future of the euro zone while incomes in the UK have been squeezed by low wage growth and high inflation.

A “black cloud of uncertainty” is hanging over investment decisions in the UK because of the rumbling euro zone crisis, Sir Mervyn said.

The central bank downgraded its assessment of the amount of demand in the economy as well as the nation’s capacity to supply that demand – implying a pick-up in economic activity is more likely than before to lead to rising prices.

However, Sir Mervyn said there was a slightly greater chance that inflation would be below target. In May, the bank thought annual inflation would stay above the 2 per cent target for another year, but yesterday it predicted inflation would fall quickly to the target and remain at or slightly below that level for two years. – (Copyright The Financial Times Limited 2012)