Nov. 14 (Bloomberg) -- Bank of England Governor Mervyn King said the U.K. economy may shrink in the current quarter and its recovery will be subdued, prompting officials to keep open the option of further asset purchases to aid growth.
“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” King told reporters in London today. “There are limits to the ability of domestic policy to stimulate private-sector demand as the economy adjusts to a new equilibrium. But the committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”
The Monetary Policy Committee halted expansion of its bond-purchase program of quantitative easing last week after some officials raised doubts about the effectiveness of the program and others highlighted inflation risks. King spoke an hour after data showed unemployment unexpectedly rose in October, and as the central bank released its quarterly Inflation Report showing lower forecasts for U.K. economic expansion and a heightened risk of “persistent low growth.”
The economy will continue its recent “zig-zag pattern” and “may shrink a little this quarter” after 1 percent growth in the three months through September, King said.
“The road to recovery will be long and winding,” he said. “But there are good reasons to suppose that we are travelling in the right direction. The committee stands ready to do whatever it can to keep us on the right path.”
The pound pared its advance against the dollar after the report and was little changed at $1.5869 as of 12:36 p.m. in London. The currency has risen about 8 percent on a trade-weighted basis in the last 17 months, which King said was “not a welcome development.”
King fielded multiple questions on the announcement last week that the central bank will transfer income from gilts it’s purchased to the Treasury, a move that the governor equates to an easing of monetary conditions. He said the BOE’s new forecasts are based on asset purchases at 375 billion pounds ($595 billion) and the assumption that 37 billion pounds will flow to the Treasury in the coming year through the new arrangement, and smaller amounts after that.
The projections also assume no increase in the benchmark interest rate from its current level of 0.5 percent until the fourth quarter of 2015.
Controversy on the shift in cash and questions on whether it presents a risk to the central bank’s independence in setting monetary policy are a “fuss about nothing,” King said today. “I don’t think it affects anything very much.”
The Bank of England sees annual quarterly GDP growth of about 2 percent in two years, according to projections published as fan charts with the report. The bank will publish the data underlying the projections next week.
It also forecast that inflation will be at about 1.9 percent at the end of its forecast period and downplayed the potential impact of low productivity growth on prices. While it raised its near-term inflation projections from August, it said the risks to price growth being around the 2 percent target in the medium term are “broadly balanced.”
The central bank noted that there is a range of views among the nine-member MPC for the outlook for inflation and it said the recovery will be “sustained, but slow over the next three years.”
“The weaker GDP profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed” previously, the central bank said. “There seems a greater risk that the U.K. economy may be in a period of persistent low growth.”
The euro-area debt crisis remains the biggest risk to the U.K., according to the central bank. Data today showed Portugal’s economy shrank for an eighth quarter and unemployment rose, data today showed, while Greece’s economy contracted for a 17th straight quarter amid austerity measures tied to the country’s 240 billion-euro ($306 billion) bailouts from the European Union and the International Monetary Fund.
A report from the U.S. today will probably show retail sales fell in October for the first time in four months as superstorm Sandy kept consumers in the Northeast away from stores, economists said in a survey. The projected 0.2 percent drop in purchases would follow a 1.1 percent gain in September. The Commerce Department will release the figures at 8:30 a.m. in Washington.
The Bank of England also said today that higher energy costs may damp spending, while the government’s fiscal squeeze is adding to pressure on the economy. The recent strength of the pound is affecting companies’ competitiveness, it added.
Data today showed that U.K. jobless claims rose at the fastest pace in more than a year and job creation slowed. Jobless-benefit claims increased 10,100 to 1.58 million in October, the most since September last year, the Office for National Statistics said. The median of 28 estimates in a Bloomberg News survey was for no change.
Employment based on International Labor Organization methods rose 100,000 in the three months through September, half the pace of the previous period, as a boost from the London Olympics began to fade.
Data yesterday showed inflation accelerated more than economists forecast in October due to higher university tuition fees. Consumer prices rose 2.7 percent from a year earlier, the fastest since May, compared with 2.2 percent in September.
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