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.


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 330.


    No Smash the Public Sector & Massive reductions in the Welfare Benefits. End all Benefits Child allowance etc.
    Scrap the minimum wage reduce income Tax Theft by at least 50 % VAT back to 10 %
    Scrap Public Sector Pension & give em basis State Pension. Remove all non-essential services into Private Sector.
    A revolution which will save the Nation. And Hard working Tax Payers.

  • rate this

    Comment number 329.

    We don't live in a democracy. We live in a plutocracy - rule by the weathly. The only thing that will change all this is for most people to stick together against the elites. The elites are the ones who gain from stocks, shares, derivatives, asset inflation, etc. The vast majority of people work long hours just to get by. If they are unemployed they are told it's their fault, not the system.

  • rate this

    Comment number 328.

    The problem the Governments have is that the Banks are in real terms bust/bankrupt. How would it be if every player in Las Vegas Won at the same time - well that is what INVESTMENT banking implied. The truth is that they were paying out money they didn't have and claiming PROFITS they never made. You simply can't re-inflate the banks as too much was lost.

  • rate this

    Comment number 327.

    When I have surplus money in my account, the bank gives me nothing in interest. But when I go overdrawn, like many people do, they they charge me endless 'charges' plus exorbitant rates of interest. When I bank a cheque it takes 4-5 days to clear but when I write one, the money leaves my account almost immediately. Unless these abnormal bank practises are revamped, there won't me much good news.

  • rate this

    Comment number 326.

    And Dave wants a cultural change in schools towards sport. Phenomenal, Dave, absolutely phenomenal.

  • rate this

    Comment number 325.

    Is this really any surprise ? Finally the truth is out, Osborne et al don't have a clue, they are alright, so to hell with the rest of us. Not only does he look like the idiot Son he acts like it as well. Not that Danny "wee laddie" Alexander is any better, just one of Clegg's co- opportunists, how can anyone look across a meeting room and see this pair of dummies with anything but disdain ?

  • rate this

    Comment number 324.

    Look till we address the £13trillion that is stored in offshore account by all the big buisnesses there is no way we are getting out of this recession but I havent hear mr cameron or the bank of england saying anything about that

  • rate this

    Comment number 323.

    The Bank of England predicted growth of 2% and it's zero, now they are forecasting growth of 0% will it be negative growth?

    The money given to Banks would have been better off given to businesses, if the banks getting loans at 0.5% and charging customers considerably more can't make money what chance is there for the rest of the UK.

  • rate this

    Comment number 322.

    "Basically, I want politicians who look out for everyone in society, not just their friends. "

    There aren't any. Better to get your hands off your keyboard and get yourself elected. Then you can put everything right - if you still want once you've become one of the ruling classes.

  • rate this

    Comment number 321.

    All these articles don't help one bit... Just destroying any confidence in we might have been getting back...

  • rate this

    Comment number 320.

    ive had a cracking idea.....why not give some more of our money to the rate fixing , bonus grabbing money laundering banks..... they seem to know what their doing and making themselves money.....its life jim but not as we know it...............

  • rate this

    Comment number 319.

    Well the Olympic boost has certainly helped hasn't it? But then it was always just a load of lies as is any positive legacy except for a few who will make money. Perhaps Hoy might consider paying his full tax, including National Insurance, and we could take back Coe's pay, who claims he loves sports but gets paid a small fortune.

  • rate this

    Comment number 318.

    @ 296. GasheadGooner
    1 MINUTE AGO - I believe everything you said -

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

    Now it is becoming a bit clearer why we are in this mess.

    Blue or Red makes no difference: they are one and the same!!!

  • rate this

    Comment number 317.


    'Chancellor George Osborne says UK economic recovery is "on track" despite "challenging" global conditions. He told MPs the OBR's assessment was that there "will be no double-dip recession", with "considerably higher" growth this year than it had predicted in June.

    George Osbourne 2010'
    Reads more like an obituary than a quote.

  • rate this

    Comment number 316.

    "All the leadership that you David have shown us, all these things have prepared us for this moment, the moment when we ask to take our country forward at a time of enormous difficulty, 0ur determination as compassionate Conservatives to protect the most vulnerable. We must rescue a lost generation from the jobs crisis that afflicts our country."

    George Osbourne 2010

  • rate this

    Comment number 315.

    Cheer up! Germany has JUST reduced its predictions of growth in 2012 to basically nil.

    While Italy has a highest rate of sovereign debt to GDB (123%) among leading European nations and will have to ask for a bailout next year.

    [this year's money has been already earmarked for bailing out Spain.]

  • rate this

    Comment number 314.

    I am uncomfortable with forecasts, positive as well as negative.
    The negative predictions seem to be talking us into further recession, the positive ones are often just plain daft, like 'an end to boom and bust' or Salmond claiming he will lift Scotland out of poverty.

  • Comment number 313.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 312.

    Getting so so bored of these scaremongering stories now. Makes no difference whether we are in or out of recession, the story's' the same. Doom and gloom.

    Joe Blogs need not know all the minute detail routinely circulated in these articles. He does not know what to do with it. All it does is scare him further and makes him not want to part with his hard earned cash. And so it continues...

  • rate this

    Comment number 311.

    We desperately need to try something different, because what we're doing now obviously isn't working and will result in the common working man (and woman) footing the bill for the greed and stupidity of the few.


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