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 430.

    Mad idea, please shoot down in flames...

    If the wealthy are hiding trillions in offshore accounts, then surely a fair proportion of it is in GBP?

    Offer an amnesty, for say one week. Declare your UK capital in GBP, move it back to the UK.

    Fail to comply and it’s null and void, money is only a promise after all.

  • rate this

    Comment number 429.

    389. ConnerMacleod - so lets put it another way, If a reckless lender in your family gave all your savings to a fraudster, who assured you he will lend it back to you at a massively inflated rate. Then they refuse to lend it back to you and buy a nice new Ferrari and then ask for more. That's the Tory master plan - our tax is the countries savings - Cameron & Clegg gave it all away to fraudsters

  • rate this

    Comment number 428.

    I'm fed up of reading about Bankers facing difficult decisions, fed up of hearing them talking like politicians and popping up to forcast the next economic front to blow in from Europe like some pampered groundhog. Couldn't predict the 2008 crash? Didn’t predict this years growth? Why on earth should anyone listen to these obtuse ramblings about ‘headwinds’?

  • rate this

    Comment number 427.


    I don't disagree with you, but the problem is, for Keynsian economics to work you need to build up a surplus in the good times. Something Gordon Brown spectacularly failed to do in his years in charge of the purse-strings.

  • rate this

    Comment number 426.

    An economy can't 'grow' if people generally speaking have nothing!..STOP taking everything off the least able to lose it & giving it to all those who wouldn't even miss it!..It's not really rocket science now is it!?

  • rate this

    Comment number 425.

    Mervyn King has run the economy into the ground - and dictates what the two gormless Tory boys do. Hence, austerity in a recession. He and the 'Coalition' are a disaster. Read Paul Krugman in the NY Times if you want to know the truth. The BBC is scared of the Tories cutting their funding even more - so they keep mum. Disgrace. And Olympic glory!

  • rate this

    Comment number 424.

    1 person making money from the olympics is Lord Coe, wish the wallies running this country wld get there heads out of there backsides &admit they ALL wrong and we as a country need to learn not to be polite and say no to all these banks and countries that have got themselves in trouble I dont vote not cos cant be bothered but cos they are all the same they promise the earth and deliver nothing !

  • rate this

    Comment number 423.

    King: "There are certain things central banks cannot do, we cannot create money just to give it away."

    Please could somebody explain quantitative easing to me again?


  • rate this

    Comment number 422.

    67.Nathan Hobbs
    "Until house prices have dropped to sensible levels, the economy cannot recover."

    Very true - would the common sense solution be to build lots more houses ? Supply would increase, the price of houses would drop, jobs would be created and the economy would benefit !
    Govt could give temporary tax breaks to construction companies to get things moving...

  • rate this

    Comment number 421.

    Cameron should be spending every hour of the day sorting this crisis out, along with trying to repair his warring government. Instead he seems to spend his entire time at the Olympics.

  • rate this

    Comment number 420.

    I'll ask again, 4 Questions Mervyn.

    1 Who creates 97% of the money supply & puts it into circulation?
    2 In what form do they create it; as debt, or debt free?
    3 Who gets first use of it?
    4 For what purposes?

    1 Commercial banks
    2 As debt
    3 Banks
    4 Private profit

    What should the answers be.

    1 The State
    2 Debt free
    3 Public purse
    4 Society/Taxpayers

    End fractional reserve banking !!

  • rate this

    Comment number 419.

    The success of team GB at the Olympics as put into stark contrast the values of determination, hard work and selflessness of our athletes with the greed, self interest and corruption of the bankers, politicians and the ultra rich of this country. We need huge cultural change. Reward should be more equal and the worship of greed and the greedy should end. That would be a real Olympic legacy.

  • rate this

    Comment number 418.

    Just about everyone could have predicted this, the economy isn't working and yet the BoE and Government are not doing anything useful to put real money in the pockets of real people so that we can spend it. QE is just a non existent way of helping the economy because we the people never see any benefit. The Government would be better reducing VAT & Fuel costs so that we have more money to spend.

  • rate this

    Comment number 417.

    Its about time the UK government acted on advise other than that meted out to it by bankers.

  • rate this

    Comment number 416.

    @ 402 saf,

    The rich will simply live in their little communities protected by barbed wire and their little private army. Amazing that we send probes to Mars yet we still live in the jungle with the rich and their greed.

  • rate this

    Comment number 415.

    as everybody seems to owe everyone else money, surely the time has come to 'reset' the clock to zero and start all over again. If I owed my neightbour £250 and he owed me £250, we'd call it quits but in a global economy, we'd each charge each other 7% interest pa

  • rate this

    Comment number 414.

    Three words: Counter Cyclical Spending. Basic Keynesian economics is the only way out of this mess.
    Maybe Keynes wld be turning in his grave about what's been proposed in his name by present day politicians though. Borrowing to spend in a boom followed by borrowing to spend in a bust resulting in a huge structural deficit was probably not what the great man had in mind.

  • rate this

    Comment number 413.

    i like how some are quick to blame the coalition for this,but hear ye labour hardcore twas your inept band of rogues that catapulted us into this mess, the current situation will not improve for some time because globally we are in a state, whoever came to power after the last GE would have had a hell of a job to sort this out, i am no tory voter but give them a chance,no gain without pain i fear

  • rate this

    Comment number 412.

    What is the difference between Quantitave Easing and Deficit Financing?

  • rate this

    Comment number 411.

    Osborne's economic policy was premised on private sector growth providing the jobs and tax revenue to pay of the deficit.
    His much proclaimed aim to reduce the defiict in 4 years was aimed at the 'markets', to ensure low interest rates on UK govt. bonds.
    The economic crisis world wide has scuppered his Plan A.
    The loss of the AAA rating would put us in the same place as Greece.
    Be worried.


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