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 670.

    I'm not suprised by this but what continues to suprise me is that the powers that be do not seem to be making any meaningful effort to stimulate growth. We here a lot of talk about the defecit, but if people felt more confident and less like they are treading water, they'd spend more and generate more tax to clear the defiecit and the economy would grow.

  • rate this

    Comment number 669.

    I have my own business and pay a high rate of income tax and could easily afford and would gladly pay more tax targetted toward infrastructure projects (investments in the future) and to stop cuts in the NHS and to public services like bus routes, schools and libraries. I'd rather invest in growth than plod deeper into recession.

  • rate this

    Comment number 668.

    The really bad news for Osbourne is that his towel folding job has been filled, and his part time job as official wrecker of the economy, is shortly about to end: and not before time.

  • rate this

    Comment number 667.

    Those who persist in blaming Mrs Thatcher for all Britain's ill obviously don't remember the Hell of living under Wilson, Callaghan and Heath.

  • rate this

    Comment number 666.

    At least the Greeks have taramasalata and tzatziki.

  • Comment number 665.

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

  • rate this

    Comment number 664.

    Pioneering astronomer and physicist Sir Bernard Lovell has died aged 98.

    While we have to read reports that certain has been by the name of Madonna was a big fiasco in Poland.

  • rate this

    Comment number 663.

    This is to be expected with all the money that has been taken out of the economy by this Tory led admin.
    It would have been bad enough on its own, but at the same time as the troubles in the euro zone its just suicidal. The arrogance of Osborne, Camoron and Clegg is breathtaking, If we keep on this path then we really will be plunged into oblivioun.

  • rate this

    Comment number 662.

    Yet another prediction of growth....what a carry on.

    Economics should be seen as guess work only, might as well throw some darts and see where they land and make a growth rate guess.

  • rate this

    Comment number 661.

    Eventually the economy will pick again, though perhaps at a more reasonable rate of growth. When it does pick up, we should pay down our national debt and then create a fund that can be invested to help us when the economy inevitably goes bad again.

  • rate this

    Comment number 660.

    Cant believe this story is taking the headlines when there are more serious issues to discuss like house of lords reform & boundary changes

    Seriously its hardly news - its not something anyone outside the government doesnt know

    How come Germany, USA etc have growth?

    So Condems? When do you think its about time for a change of policy or will you ride out your half baked ideas to OUR bitter end?

  • rate this

    Comment number 659.

    I have better plan how about we take the money back from those who have been avoiding tax and hoarding it and give that money to small business to create jobs, preferable to small business that make things that sell, not banks and the financial wizards. No wonder they get called wizards, its mostly been conjured out of thin air and is about as substantial.

  • rate this

    Comment number 658.

    The problem with post-Thatcher capitalism is that wealth is increasingly gathered by the few at the expense of the many. That means more people with less money in their pockets who are consequently less able to spend to get the economy going. Nothing from this government (or the last) seems to address this basic fact.

  • rate this

    Comment number 657.

    Well what chance do I have, I am Bipolar-I, already spent over 2 years seriously ill in a psychiatrict hospital, well into my fifities, Remploy being closed down and now no prospect of growth. I guess it could be worse I could be dead.

  • rate this

    Comment number 656.

    This government doesn't have a clue - we are wise to them continuing to blame the old Labour administration (who left things a lot better than they are now)

    Dave - you turned out to be rather terrible at the PM's job
    George - please put your extensive private sector experience (folding towels in Selfridge's) in a more appropriate role - folding towels in a department store
    Nick - who cares??

  • rate this

    Comment number 655.

    #633: "They have reduced taxes, for the rich!"

    Really? All I see is a potential halving of the increase in income tax imposed by Labour, as part of its politics-of-envy agenda, on those earning over £150K (which includes far more people than the derided "rich"). They've done nothing to redress Labour's personal allowance changes that result in those earning > £100K paying 60% effective tax.

  • rate this

    Comment number 654.

    541. JDansey
    Any market will eventually correct itself.

    Oh most certainly it will. The last time we had this style of government with a so clever chancellor, interest rates went to 17% and the pound fell of a cliff. Now let me see who was the PM? Yes of course Margaret Hilda Thatcher. Don't you just love the Tories, and this lot are out Thatchering Thatcher.

  • rate this

    Comment number 653.


  • rate this

    Comment number 652.

    Double dip recession? Can you say DEPRESSION!... Look, these so called experts in politics and banking have no clue how to fix this mess they created. It's all circling the drain and no matter how much digital money you throw at it isn't going to work. So remember the 3 G's for when all this hits the fan. Guns, Gold, Get-away Plan.

  • rate this

    Comment number 651.

    Ok i don't know much about economics, however shouldn't the chancellor of the Exchequer be required to have at least some economic knowledge?? Also at a time when our economy is in desperate trouble instead of each party blaming the other shouldn't they all get together and work out the best course for recovery - idealistic i know and will never happen, but what do the rest of you think??


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