Bank of England Cuts Outlook for Economic Growth
Bank of England Governor Mervyn King
Simon Dawson/Bloomberg
Mervyn King, governor of the Bank of England said inflation will probably slow below the bank’s target in 2012.
Mervyn King, governor of the Bank of England said inflation will probably slow below the bank’s target in 2012. Photographer: Simon Dawson/Bloomberg
BOE governor Mervyn King
Chris Ratcliffe/Bloomberg
BOE governor Mervyn King said July 28 that policy makers “must be careful not to read too much into one number.”
BOE governor Mervyn King said July 28 that policy makers “must be careful not to read too much into one number.” Photographer: Chris Ratcliffe/Bloomberg
Bank of England Governor Mervyn King said inflation will probably slow below the bank’s target in 2012 and growth will be weaker than previously forecast, signaling the U.K. economy may need more emergency stimulus.
Inflation will be about 1.5 percent in two years, below the 2 percent goal, the central bank said in its quarterly Inflation Report today. Inflation will undershoot the target even if the bank keeps its benchmark interest rate at the current 0.5 percent, the forecasts show. Growth may peak at a 3 percent annual pace instead of the 3.6 percent rate forecast in May.
“The overall outlook is weaker than that presented in the May inflation report,” King said at a press conference in London. He cited the “persistence of tight credit conditions” and planned budget cuts as risks to growth.
The pound fell after his comments, which came a day after the Federal Reserve reversed plans to exit its own emergency monetary stimulus plan. U.K. policy makers have split on the outlook for inflation even as the biggest round of budget austerity measures since World War II clouds the prospects for the economy.
The pound slipped as much as 0.5 percent after the report, and traded at $1.5716 at 12:45 p.m. in London. The yield on the two-year government bond declined as much as 4 basis points to 0.703 percentage point.
Loosening ‘Likely’
“They still look more likely to loosen policy than to tighten,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “The Monetary Policy Committee continues to believe that spare capacity in the economy will pull inflation down sharply in the next couple of years.”
The committee “stood ready to respond in either direction as the balance of risks evolve,” the Bank of England said in a statement. “Inflation is a little more likely to be below the target than above it during the second half of the forecast period” and the risks to growth “are judged to be weighted to the downside.”
The Bank of England held its bond-purchase plan at 200 billion pounds ($315 billion) and kept the main rate at a record low on Aug. 5. Minutes of the June and July meetings show Andrew Sentance called for higher rates to curb inflation. His colleague David Miles has since argued that the recovery may falter and the bank should be ready to increase stimulus. The minutes of the most recent meeting will be published on Aug. 18.
‘Quite Prepared’
“If it is necessary to respond, then we are quite prepared to do that,” said King. “It’s much too soon to say that we’re struggling to see a recovery.”
Recent data has painted a mixed picture of the U.K. economy. While a report today showed employers added jobs in the second quarter at the fastest rate since 1989, it also said that jobless claims dropped less than economists forecast in July. Measures of manufacturing, services and construction fell last month and Nationwide Building Society said today that consumer confidence dropped to the lowest in 15 months. The housing market is also showing signs of faltering.
At the same time, economic growth accelerated to 1.1 percent in the second quarter, the most in four years.
While inflation will be faster than previously forecast next year because of higher sales tax, it is “likely to fall below the target as persistent spare capacity weighs on companies’ costs and prices,” the Bank of England said. “There is a range of views among committee members” on the risks.
Fed Decision
Today’s report suggests the U.K. central bank may be quicker to restart stimulus for the economy than the Fed, according to Rob Carnell, an economist at ING Financial Markets. U.S. policy makers yesterday set a floor of $2 trillion on the central bank’s bond holdings to support a recovery that’s proved weaker than anticipated.
“With ongoing economic weakness, and downside risks around the inflation outlook, the U.K. probably offers greater scope for a re-expansion of quantitative easing compared to the U.S., which made a tentative move in that direction,” Carnell wrote in a research note.
The Bank of England’s forecasts are based on investor expectations that its main rate will rise to 1 percent in the fourth quarter of 2011 and 1.9 percent by end-2012. At constant interest rates, inflation will still undershoot the target in two years, the bank’s predictions showed.
“The bank is unlikely to raise interest rates anytime soon and if it acts at all in the near-term it is more likely to be to revive Quantitative Easing,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is clearly a very real possibility that the Bank of England could revive quantitative easing should the economy falter appreciably over the coming months and/or credit conditions remain tight.”
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
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