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”

End Quote

"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
    +2

    Comment number 650.

    So four years into a financial crisis the only thing thats clear is that there is no quick and easy way to get back to a growing and relatively prosperous economy, let alone a concensus on which way to proceed. The comments here demonstrate that. My big worry is that as we get closer to the election the long term planning neccesary will be put on hold in favour of short term political gain.

  • rate this
    +1

    Comment number 649.

    "rememberdurruti They have reduced taxes for the rich!"

    Pension contribution cap £325k under Labour, £50K under coalition

    EBT tax avoidance legal under Labour, banned by coalition November 2010
    Tax fee allowance. £6,475 under Labour; now £8,105
    Months where top rate of tax 50% under Labour = 1. Months where top rate of tax 50% under coalition = 23

    Labour were the tax avoider's dream

  • rate this
    +2

    Comment number 648.

    For a deluded microsecond, I read "Bank cuts itself to Zero".

  • rate this
    +4

    Comment number 647.

    I think the only use that this buffoon Mervyn King could possibly achieve would be to dress up as Santa Clause every Christmas, His achievement over the last few years is to count down to zero nil zilch F.A

    As for that pompus clown Osbourne with the loose tag of chancellor of the exchequer! Admitted that his work has amounted to absolutely zero in the last 2yrs BRILLIANT!

  • rate this
    0

    Comment number 646.

    We seem to be forgetting that EVERYONE is in debt to record levels! Credit Cards, Loans, Instant Credit! No one has any money to spend because they spent all the banks money and it was their choice to do so! You could have saved for that handbag but you whacked it on your credit card.... Its not all the governements fault most people are skint!

  • rate this
    -1

    Comment number 645.

    Osbourne has got to go and I doubt if V Cable could do any better with the veiws of the Tories to take into consideration I am going to cause fury here bring back G Brown at least we all felt good and other countries had faith in us

  • rate this
    +1

    Comment number 644.

    569. David Mills
    Yes, why are the tax payers funding banks so they can lend us our own money back plus interest?
    Surely better to cut out the middle man & go for tax cuts, or some kind of vouchers system instead?
    It won't sort out the long term problems though because you can't force the Brit's to buy goods we don't make anymore.
    We need to export far more than we are to balance things.

  • rate this
    0

    Comment number 643.

    “512. P Uxbridge
    get educated and you might get a living wage people in the UK want everything for nothing benefits should be reduce to the bare minimum”

    You miss my point… The cost of living, in certain areas, will not support the tertiary employment they require. So ether the costs need adjusting (housing) or start paying McDonalds employees a £40k London allowance.

  • rate this
    +4

    Comment number 642.

    Just because the spending on Olympics ticket are counted as being in this period does not mean an Olympic boost. 85% of tickets were sold to British people and that money would have been spent elsewhere if not for the Olympics. The large cost to other businesses as a result of the Olympics which will more than compensate. The building of venues and regeneration were tax payer funded as well.

  • rate this
    -1

    Comment number 641.

    337.jrf "We need to spend on infrastructure and exports"

    infrastructure, maybe but how d'you spend on exports? If you mean export more goods, nice...but you need people overseas to buy the stuff. That isn't happening - or we wouldn't be in this recession.

  • rate this
    +2

    Comment number 640.

    Do the BoE, Osbourne & Co. have any ideas on how to get us out of this mess? Erhh - No!

    We need major investment in infrastructure, creation of jobs and direct lending to small/med british businesses. The High St. banks are sitting on the cash from QE, so we need a Plan B. The financial markets have a lot to answer for, and as usual the great british public pick up the tab!

  • rate this
    -2

    Comment number 639.

    cut the wellfare bill and our problem ends.
    we spend more than we earn.
    if we all did the above we would have to make some hard choices and thats were the country is heading.
    give up work take the stress away and let some other twit pay for you.
    if i am not that much worse off i will do it.

  • rate this
    +7

    Comment number 638.

    Don't worry! All this economic marlarky will be over by Xmas, because George is going to focus on it 110%...But not just now, when he gets back from his important Holiday....

  • rate this
    0

    Comment number 637.

    @611 corrupt financial markets? That's a little opportunistic of you applying a retrospective moral assessment. What's next, a stalinist trial?

    @612 mothers? Great to see gender equality in a modern society, should men have the same child care costs paid

  • rate this
    +1

    Comment number 636.

    Labour did indulge themselves with borrowing, but let’s not forget they also brought into the whole free up business, trickle down crap as well. The rich got even richer under Labour, left wing my armpit. Trouble is they soon found out that giving even more money and perks to those at the top didn't trickle anywhere it just got salted away, thanks very much. The Tories have the same delusion.

  • rate this
    +3

    Comment number 635.

    All the solutions or strategies listed by others below are presupposing a govt with will to enter themselves as the starting handle of the economy. This is a govt which doesnt believe that so none of the remedies offered will be tried. They believe in de-regulation and the power of the markets and NOT the govt.

  • rate this
    +3

    Comment number 634.

    Comparatively our Q2 results were far worse than France and Germany. Not surprising really when you consider the man in charge of the economy has a degree in modern history and no business experience. How can Osborne honestly believe that more QE, increased fuel duty and VAT on sausage rolls really get us out of the worst double dip recession in a century?!

  • rate this
    0

    Comment number 633.

    @599
    They won't reduce tax because (I think) as long as they can "balance the books", people might still vote for them next


    They have reduced taxes, for the rich! Result, economy still heading towards oblivion.

  • rate this
    0

    Comment number 632.

    George Osbourne is reaping what he has sown.

    The Tories won on a rhetoric of cut cut cut, save save save and the side effect is the little man up to the big business are doing exactly the same meaning the Economy has flatlined.

    It's a Tory lie about you cant spend your way to recovery..George expects us and business to spend our way to recovery while he robs vital services of taxpayers money!

  • Comment number 631.

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

 

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