Bank cuts growth forecast close to zero


Sir Mervyn King: "Economy faces headwinds and a black cloud of uncertainty hangs over investment"

The Bank of England has cut its growth forecast to close to zero from about 0.8% predicted in May, as the double-dip recession intensifies.

The quarterly inflation report indicated no growth for 2012, compared with 2% predicted a year ago.

The data had fuelled anticipation for an interest rate cut, but Governor Sir Mervyn King dismissed calls for a reduction in the near term.

He said recovery hopes had consistently been dashed.

"The big picture is that output's been flat for two years, and has continually disappointed expectations of a recovery," he told a news conference.

"We are navigating rough waters and storm clouds continue to roll in from the euro area," he added.

"Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness."

He said that the future was unpredictable, since no-one could predict what would happen in the eurozone crisis, which would have an impact on the UK.

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There was no getting away from the gloomy news in the Bank's latest quarterly report”

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"It's a saga that goes on, and on, and on. [The idea] that we have come to the end of it is unrealistic. There's still a long way to go," he said.

Regarding interest rates, which currently are at an all-time low of 0.5%, he said: "Another quarter point [cut] on bank rate is not going to be the difference between having a recovery and not having a recovery."

A rate cut would damage some financial institutions, such as building societies, and therefore would be "more counter-productive than beneficial".

'Grow the economy now'

Chancellor George Osborne said that economic growth was "disappointing", but that the government had an opportunity to "give its 110% attention and effort and energy" to getting it moving.

George Osborne: "The economy is healing"

However, Labour's shadow chief secretary to the Treasury, Rachel Reeve, said the government's policies were doing long-term damage to the economy, adding: "It is clear that we cannot go on with the same failing plan from this government."

John Longworth, the director general of the British Chambers of Commerce, which represents small and medium-sized businesses around the country, said the government could be doing more to promote economic growth.

"Businesses are feeling confident in their own abilities, but worried about the general economy and the eurozone crisis," he said.

"So one of the key things the government and the Bank of England need to do is to actually build business confidence so those businesses that have cash can start to invest and grow the economy now," he added.

The Bank has struggled to explain the discrepancy between Britain's weak output and a recent improvement in the labour market, which suggests that productivity growth is "unusually low".

"That continues a recent pattern of both weak output and productivity growth that is difficult to explain," said Sir Mervyn, adding that that was a factor behind the Bank's downgrade.

Action predicted

Rachel Reeve: "Policy decisions have put downward pressure on the economy"

The pound jumped in value to 1.27 euros on the money markets following Sir Mervyn's comments.

However, analysts said the Bank would be forced to act to shore up growth in coming months, once the effects of its stimulus measures on the economy had worn off.

Sir Mervyn's comments "clearly point in the direction of further accommodation in the coming months", said Annalisa Piazza of Newedge Strategy.

"The current inflation profile doesn't show the need of an urgent move, but in our view, the BoE will be ready to act in November, when the ongoing asset purchases programme will terminate and the effects of further credit easing might be clearer," she added.

Vicky Redwood, chief UK economist of Capital Economics, agreed.

"The door is clearly open to more stimulus and we still expect both more quantitative easing and a further interest rate cut in November," she said.

The UK recession deepened between April and June, with output falling by 0.7%, official data released at the end of July showed.

The Office for National Statistics said the bigger-than-expected contraction, which followed a 0.3% drop in the first three months of the year, was largely due to a sharp slowdown in the construction sector.

Funding for Lending

The Monetary Policy Committee has continued its programme of quantitative easing (QE) in which it pumps fresh money into the banking system to try to boost lending and thus the wider economy.


You may not be able to feel it, but the Bank thinks the economy is coming out of recession right now.

Its report firmly forecasts a rebound in economic growth in the third quarter of this year.

And it reckons this will be followed by modest economic growth thereafter.

The Olympics has something to do with it.

It is far more than a nebulous feel-good effect. And it is not even to do with tourists spending money.

The Bank's chief economist, Spencer Dale, explained that the big economic effect will come from the official statistics registering all that spending on Olympic tickets, and the sale of TV rights.

The Olympics could not have come at a better time.

In July, it injected a further £50bn into the system, taking the total value of the Bank's QE programme up to £375bn.

The Bank and the Treasury have also launched a new scheme to increase lending to households and companies.

Under the Funding for Lending initiative, the Bank of England is initially expected to lend about £80bn at below-market rates to banks and building societies.

The initiative aims to reduce the pressure from rising bank funding costs which have fed through into higher rates for domestic borrowers.

"Although its overall impact is uncertain, the early indications are positive, with some banks cutting their loan rates. By the time of our next [inflation] report in November, I hope it will be possible to say more about the initial effects of the scheme," said Sir Mervyn.

Meanwhile, eurozone speculation is currently focused on Spain, which has already secured a 100bn-euro rescue deal for its banks.

It is feared that if Spain's government is cut off by the markets and has to seek a full-blown bailout, Italy may follow close behind, which would exhaust the eurozone's current bailout capacity.

That would have far-reaching consequences for Britain, which is the euro area's biggest trading partner.


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  • rate this

    Comment number 50.

    Bankers and politicians much the same really both in it for what they can get.

  • rate this

    Comment number 49.

    Put interest rates up already. I've been prudent all this time and I deserve some reward. People who can't afford their repayments on their debts .... tough. You deserve to go bankrupt and I deserve to pick your house up for tuppence. I've done everything right and you've done everything wrong.

  • rate this

    Comment number 48.

    “lend about £80bn at below-market rates to banks and building societies”

    So they lend money to banks at 0.25% or whatever (below inflation, so in reality a gift), which is then lent by the banks at a substantially higher figure (12.9% APR?) to the public.

    I can see how that would help banking, how is it going to help the wider economy?

    Give UK tax payers £2k each, that might help more.

  • rate this

    Comment number 47.

    However often the recession dips, Scotland will be fine because Salmond has promised to lift us out of poverty.

    Perhaps when he has finished with his magic wand, he will lend it to Westminster?

  • rate this

    Comment number 46.

    Economic stories are dominated by bank balance sheets, GDPs, FTSEs, Libors, indices.


    The REAL economic story is one of declining wage rates, ever-greater disparities of wealth and income, and attempts to create a labour market without any rights, protection or security whatsoever in order to bolster corporate power and profits.

    The rest is just a smoke screen.

  • rate this

    Comment number 45.

    Look - these guys are not out-of-touch or incompetent they are deliberately lowering the value of the £ with QE because that is the only way they can think of to lower our debt and make the few exports we have cheaper.

  • rate this

    Comment number 44.

    Giving banks access to cheap taxpayers money so that they can then lend it to taxpayers after they have marked it up does not help the economy. It helps banks but nothing else, see the economy for evidence of this phenomenon.
    If you really want to boost the economy cut out the pointless middle men, the banks, and lend at low rates to the public.

  • rate this

    Comment number 43.

    It's the weather .. It's the Olympics .. it's .. LABOUR'S FAULT !!

  • rate this

    Comment number 42.

    Sir Mervyn King - why is this man still here? The deep recession is in part HIS FAULT for making the wrong calls time after time. Bring back David Blanchflower and throw Mervyn in the tower!!!

  • rate this

    Comment number 41.

    Only a banker could come up with the a scheme that the Government lends the banks money at a very low intesest rates that the banks would lend at 10 or 20 times this rate to the general public as a way of solving the problem. All we are doing is boosting bank profits in the misguided belief this will solve the problem. Why support the banks who caused the problem in the first place?

  • rate this

    Comment number 40.

    If we didn't have these reports and predictions, would it make any difference to our lives?

    It's what we do in our own life that matters most. We are the masters of our own destiny.

  • rate this

    Comment number 39.

    "Best start borrowing money then, it's the only way to fix thing"

    Like Italy, Spain & Ireland have done?
    Spain -0.7% growth
    Italy -0.7% growth
    Ireland -1.1% growth

    Zero growth puts us ahead of the game

  • rate this

    Comment number 38.

    Whether it was 0.8% or zero is meaningless anyway. It's all trailing true inflation, so savers and anyone in a pension scheme that has to buy government bonds are the ones being robbed.

    "GDP only measures how fast you're going, not whether you're getting anywhere"

  • rate this

    Comment number 37.

    Not really a surprise is it considering the state of the global economy.

    Living standards peaked in 2007. The only way is down.

  • rate this

    Comment number 36.

    Sill look on the bright side, Cameron and Osbourne bashed the poor and sick which was after all 'the plan' nothing to do with balancing the books. Sadly their need to look and act tough going well over and above the reigning in on spending that was allready in place has removed any resilience in the UK economy to outside influences.

  • rate this

    Comment number 35.

    Success at the Olympics only came after years of investment in sport. The only way you are going to get growth in the economy is by sustained investment - stimulating growth through job creation, offering wages and prices that encourage commerce. Money is flowing upstream in our economy, fewer people gathering more and more - anyone can tell you it is unsustainable.

  • rate this

    Comment number 34.

    No surprise

    The banking system was not saved from collapse in 2008 IT WAS PROPPED UP & the risk put on to the taxpayer

    All the major parties that support /collude with 2 BIG 2 FAIL are just there to give the illusion of choice

    This system is NOT about a few "bad apples" IT IS rotten to the core We need no more evidence of that

    The BANKSTERS R holding a gun 2 the taxpayers heads I SAY PULL

  • rate this

    Comment number 33.

    Do predictions really matter? They just cause market volatility when they inevitably turn out to be off the mark.
    Sure stimulus is helping keep markets bouyant but the economy as a whole wont recover till debt is reduced (both individually and nationally) and controlled spending can recommence.

  • rate this

    Comment number 32.

    The key thing is to keep working down public sector spending. That we do control. Growth (genuine growth, not debt-fueled Labour "growth") will come when it comes.

  • rate this

    Comment number 31.

    On bloomberg King says Cameron is on the right track. Just gotta keep ploughing on . Dull article.


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