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.

 

More on This Story

Related Stories

The BBC is not responsible for the content of external Internet sites

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +228

    Comment number 17.

    Forget economic growth, it's far less important right now. The shift of money from the poor and middle to the few at the top is creating poverty and political instability, and this is the REAL issue. Far more so than these meaningless economic statistics. They imply we're neither richer or poorer than last year when in fact most of us are getting much poorer.

    Lets discuss the REAL issue BBC.

  • rate this
    +188

    Comment number 41.

    Only a banker could come up with the a scheme that the Government lends the banks money at a very low intesest rates that the banks would lend at 10 or 20 times this rate to the general public as a way of solving the problem. All we are doing is boosting bank profits in the misguided belief this will solve the problem. Why support the banks who caused the problem in the first place?

  • rate this
    +113

    Comment number 46.

    Economic stories are dominated by bank balance sheets, GDPs, FTSEs, Libors, indices.

    Meaningless.

    The REAL economic story is one of declining wage rates, ever-greater disparities of wealth and income, and attempts to create a labour market without any rights, protection or security whatsoever in order to bolster corporate power and profits.

    The rest is just a smoke screen.

  • rate this
    +97

    Comment number 67.

    Until house prices have dropped to sensible levels, the economy cannot recover.

    No-one is going to invest in manufacturing in a country where you have to pay someone £1000+ a month JUST TO COVER THEIR MORTGAGE.

    High housing costs have pushed manufacturing out of the UK to countries where the cost of living is lower.

  • rate this
    +87

    Comment number 60.

    Time for national infrastructure projects using our under and unemployed people, giving real wages that they can spend. Why borrow billions just to keep the status quo? Infrastructure (housing, roads, railway, schools, hospitals) gives us a social return and is better than giving more money to the banks, who frankly don't want to part with a penny. We might want to reconsider foreign aid too.

 

Comments 5 of 1310

 

More Business stories

RSS

Features

  • A painting of the White House on fire by Tom FreemanFinders keepers

    The odd objects looted by the British from Washington in 1814


  • Chris and Regina Catrambone with their daughter Maria LuisaSOS

    The millionaires who rescue people at sea


  • Plane7 days quiz

    What unusual offence got a Frenchman thrown off a plane?


  • Children testing a bridge at a model-making summer school in Crawley, West SussexSeeding science Watch

    The retired professor who turned village children into engineers


  • Krouwa Erick, the doctor in Sipilou town at the border of Ivory Coast and Guinea - 27 August 2014Bad trip

    The Ebola journey no-one in Ivory Coast wants to take


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.