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.

Start Quote

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.

Analysis

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
    +9

    Comment number 310.

    Like many here, I have had a bank account etc all based in a nationalised bank tainted with suspicions of corruption over Libor etc etc.

    I complained on HYS. But did nothing.

    3 weeks ago, I changed my account to a large, national building society. It was easy, quick, saves me money every month and I have put my money where my mouth is.

    I have acted. It feels good. I urge you, do the same.

  • rate this
    +3

    Comment number 309.

    Get the economics teacher from Ferris Bueller's day off involved, he knew the score...

  • rate this
    +2

    Comment number 308.

    @290.adidas thats class
    For the infrastructure - easy. Architects, surveyors, building companies. All pay wages, some of which gets spent, some back in taxes. For materials, same and all the way down the sub suppliers. Also depends on how much goes on foreign items (labour, materials, products) which is a leakage. That is why people are calling for large infrastructure projects - to repeat this.

  • rate this
    +2

    Comment number 307.

    It is hardly a major surprise, financial and economic history has shown time and time again that austerity measures cause this to happen with a 100% repeatable rate."Insanity: doing the same thing over and over again and expecting different results." Maybe it's not insanity as those who tend to profit from this are those who can cause it.

  • rate this
    +4

    Comment number 306.

    Okay let's see, the Government lends Banks OUR money at a very low rate, which the Banks then either hold on to or sparingly lend it out at much higher rates back to US. ARE WE MAD?

  • rate this
    +12

    Comment number 305.

    Whilst the chancellor deflates away the wealth of UK citizens, he seems hell bent on providing banks with cheap money which they then lend back to us at much higher rates of interest. Does this not strike anyone as odd?

    The reason is that it's the banks who provide most of the income for the elite classes.

    The rich get richer. The poor get poorer.

  • rate this
    +1

    Comment number 304.

    Why oh why do we constantly drag ourselves along the floor trying 2 salvage the situation through 'market forces'!? I read Orrell's Economyths - it beggars belief we pay money 2 quacks! why r we enthralled by quacks, idiots, thugs dressed in suits? Our instincts r still embedded in the days of the caves! Why do we feel the need to rely on spin-doctors, spoofs, cads!? Off to the pub to get sober!

  • rate this
    +4

    Comment number 303.

    What is the point of a forecast?? Its just guesswork! 2 years ago they forecast 2% and they've been revising down ever since!! For goodness sake, stop all this nonsense now and just sort it out - I'm confident that I could do a better job than these imbeciles in charge, as I predicted then that the austerity measures wouldn't work. If I can see that, why can't they???

  • rate this
    +19

    Comment number 302.

    Ozzy Osbourne would do a better job of running our economy than George.

  • rate this
    +1

    Comment number 301.

    The UK will continue to struggle until Europe starts to grow again. And that wont happen in Europe until the bunch of navel gazing arrogant Muppets finally accept that their pet Euro project has failed and allow each country to return to a currency they can control.

  • rate this
    +2

    Comment number 300.

    @15 - Angry_of_Swansea: So what you are asking the BBC to do is bury bad news because of the Olympics? Why don't you just put your head back in the sand.

  • rate this
    0

    Comment number 299.

    If we stopped paying £50 million per day to the EU for the privilege of buying more from them than we sell, not to mention losing control of legislation and being bound up in red tape, perhaps we might have a chance of generating some growth!

  • Comment number 298.

    All this user's posts have been removed.Why?

  • rate this
    +1

    Comment number 297.

    I'm at the stage where I had completely forgotten and stopped caring about the scaremongering bankers and woeful state of our economy. The Olympics work!

  • rate this
    -3

    Comment number 296.

    Can we stop this generic profiling about Tory voters? I'm not posh, I'm not wealthy, I don't own a horse, I don't hunt, I don't love bankers and I'm not a vampire.

    But guess what, I voted blue because Brown and his cronies were so ridiculous, and they still are.

    Oh, and there are several million other people just like me in the UK. Strange that, hey? Stop genericly profiling people.

  • rate this
    +4

    Comment number 295.

    Its all a lie we have just spent £9.3 Billion on the Olympics we can not be skint.

  • rate this
    0

    Comment number 294.

    247.Exiledblade
    ..interest rates..lowest they have ever been!
    Why don't the Govt 'borrow' some the money from the BoE at a favourable interest rate and INVEST in the future!
    --
    That's effectively what they're doing- BoE magicking up money to buy gov debt. But it's all a balancing act. The low gilt interest rates are predicated on govt reducing the deficit. Any slippage & rates go up.

  • rate this
    +2

    Comment number 293.

    The ONLY way the UK economy can get back on track is by having a different party in power. We've had 2 years of fascism and as predicted by all the economists, it hasn't worked.

    The UK, especially England needs the Tories out, and the sooner the better. We can't take much more of this.....

  • rate this
    +7

    Comment number 292.

    Schoolboy policies were doomed to failure right from the start of this coalition.
    Give every adult on the electoral roll £10 000 to get the economy started that would make more sense than chucking money at the banks so they can inflate salaries and bonuses.

  • rate this
    +2

    Comment number 291.

    It's ridiculous funding for lending scheme.I am looking for remortgage with 75%LTV and can't find deal.All deals are for rich who have at least 60%LTV.Whole banking is joke and made up of self service,big boys crooks. My taxes are not helping poor/middle earners. Its helping bankers and rich. BOE is involving is doing reverse of Robin Hood.I am not sure now if BOE really interested in helping us.

 

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