Gloomy forecast for British economy

Thu, Nov 15, 2012, 00:00

Britain’s weak recovery shows little sign of improving and inflation will be higher than expected, the Bank of England has predicted in its most pessimistic medium-term forecasts since gaining independence.

The BoE now thinks output in the economy will remain below the 2008 peak until late in 2015 and says “growth is more likely to be below than above its historical average rate ”.

BoE governor Sir Mervyn King told a press conference yesterday on the central bank’s quarterly inflation report: “We have decided the chances of a rapid recovery are a good deal less than we thought.”

He also warned that the economy could shrink again in the fourth quarter of this year after emerging from a double-dip recession in the third quarter.

In contrast to recent forecasts, the interest-rate setters no longer believe such weakness will cause inflation to fall below the 2 per cent target and require additional monetary or fiscal stimulus. Over the next two years, the BoE believes that inflation will be above target .

“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” Sir Mervyn said.

The combination of weak growth and higher-than-expected inflation results from a lack of slack in the economy, reducing the scope for a rapid recovery. The BoE’s monetary policy committee believes it cannot do much to rectify this problem.

Nonetheless, Sir Mervyn said the committee had not “lost faith” in quantitative easing, its bond-buying programme, nor had it decided never to use it again. He batted away questions about the treasury’s decision last week to grab the cash the BoE has accumulated through quantitative easing.

This has been criticised as blurring the lines between monetary and fiscal policy. – Copyright The Financial Times Limited 2012