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 350.

    Well we have a Work Experiance Chancellor a YTS prime minister and now I am begining to think we have the BOE led by someone with dimentia.

  • rate this

    Comment number 349.

    £50bn injection in banks does nothing – computer money – not real – numbers of a screen. Does little to provide ‘real’ cash in people’s pockets. Best idea I have heard is instead of giving banks money give £500 to consumers to spend. Why does the government not do this: for ideological reasons – in that it looks like giving free money to those who have not earned it.

  • rate this

    Comment number 348.

    The banks have shown themselves to be both incompetent and dishonest so why are they getting the money to then lend at high interest rates (or not as the case may be ) to businesses trying to do the right thing by creating growth. The simple solution is to get money directly into the pockets of businesses and consumers. Cut the middle men out and let them wither on the vine

  • rate this

    Comment number 347.

    298.Hello world

    King must go.
    Osborne must go.
    The Tories must go.

    Don't you mean

    Barrosso must go.
    Merkel must go.
    Unelected EU bureaucrats must go?

    They're the ones running our country!

  • rate this

    Comment number 346.

    The problem is the people who make all the decisions only understand the financial economy and do not understand or value the real economy (services, industry, manufacturing, leisure, etc).

    Will they ever realise that economies based on financial institutions and market trading are FLOORED and destined to FAIL! They are simply giant ponzi schemes.

  • rate this

    Comment number 345.

    If you've got a bank account with any of the banks that have destroyed the economy i would change it to one that is more fair.If everyone closed their accounts the banks would collapse

  • rate this

    Comment number 344.

    The environmental taxes (on everything) and including fuel have taken to much out of peoples pockets and also pushed other prices up, it's killed the economy. But it has made it look like we have had growth because of fuel inflation. People can't even afford to holiday in the UK if they have to drive or get a train. Giving the banks money to hand out in loans is a waste of time.

  • rate this

    Comment number 343.

    Even when (if) the economy picks up, we (the UK) are in no position to exploit this! The last 3 majorish purchases I made, the goods were all imported from China!
    Thank God, Johnny Foreigner has deemed the UK a fairly good place to invest in both plant and people, otherwise we would have nothing to produce or sell!
    Lions lead by Donkeys once again.

  • rate this

    Comment number 342.

    i run a small bar, have no staff as had to get rid of them, yes still taking a reasonable turnover. everyone keeps saying recession, where??

    The Banks keep conning us and government, pay them selves high bonuses and wages, And what is done about it? NOTHING

    Con and LIbs are standing on sidelines as most of the bank work old school chums? Totally confused what to do? let them go under,easy

  • rate this

    Comment number 341.

    under tony Blair the UK never had 0% unemployment and the UK shouldn't have had anyone on the dole! brown said there would be no boom and bust it was all false people borrowing 120% of the property price this help inflame a false economy which as now dried up that is where the money as gone and people are now paying this back

  • rate this

    Comment number 340.

    The bank of England have set a target that even this clueless chancellor may hit.

    Whats the betting he doesn`t.

  • rate this

    Comment number 339.

    King has got a point about Europe - our alleged most important trading partners. Draghi's empty rhetoric and the flip-flopping on Greece's future hang like an economic anti-cyclone over the continent. The slow down there has impacted our other global trading partners negatively as well - perhaps it is time to start withdrawing from the anti-competitive EU treaties we are signed up to.

  • rate this

    Comment number 338.

    Economists and politicians obsessing about growth is just a smokescreen for practicing what is more like MysticMeganomics.

    We need well paid full time employment opportuntties, affordable and decent housing, decent education and health provision. More equality across the population. It is not hard to understand, yet this government has failed to deliver on any of this.

  • rate this

    Comment number 337.

    We need to spend on infrastructure and exports - Invest in public transport and high speed broadband and reduce/simplify corporate tax.

    More exports = a rebalancing of the trade deficit and more employment. This in turn leads to more spending, less benefit drain, more tax, higher GPD and a way out of this mess.

    Unfortunately, this isn't a quick solution.

  • rate this

    Comment number 336.

    Now is not the time to start cutting taxes and slashing spending. Large parts of the UK private sector, such as construction and others such as team GB depend on government spending. In the short term the government must seek to spend money more efficiently and recoup additional funding by closing down the variety of loopholes that companies and individuals use to avoid paying taxes.

  • rate this

    Comment number 335.

    An excellent idea, however there is a snag. The present bunch of idiots masquerading as a government would flog off anything making a viable profit at a knock down price to their friends in the City. the country wouldn't benefit!

  • rate this

    Comment number 334.

    Britain remains a very wealthy country. Wealth is the product of resources and in particular the work we all do.

    The fact that a tiny number receive disproportionate remuneration reflects the screwed up society tolerate.

    Isn't it a civilised way forward for us ALL to take control & ownership, deciding what gives on the back of intensive, democratic debate in the most efficient form devisable?

  • rate this

    Comment number 333.

    You are right on the nail, this 'recession' is about the move of wealth from the many to the few. Our elite are simply making sure that they get their noses in the trough. The banks should have been really nationlised for the benefit of us all. House prices should have been controlled by law and a house build programme started years ago. The elite do know what they are doing!

  • rate this

    Comment number 332.

    Please let us all wake up from this Tory/banking nightmare..... If they get in in 3 years, I predict mass migration for those with good sense.

    How anyone can keep defending the Tories is utterly incredible, it reveals a level of 'fingers in the ears' behaviour never previously witnessed.

  • rate this

    Comment number 331.

    Nemesis of Socialism .. The medicine is working we just need a bigger dose.Much More Cuts in the Public Sector.
    And replace them with companies like G4S? Heaven help us. Where are all the Private Sector jobs that were supposed to arise to prevent the thousands of redundant people you advocate becoming labelled by you as "scroungers and layabouts"?


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