King Declares U.K. Recovery Is in Sight as Outlook Raised

Bank of England Governor Mervyn King declared a U.K. recovery is now “in sight” as he presented his final forecasts with an improved outlook for the economy.

In the central bank’s quarterly Inflation Report and King’s last before he retires in July, officials predicted that growth may accelerate to 0.5 percent this quarter from 0.3 percent in the first three months of the year. They also raised projections for the next three years. On inflation, the central bank sees it peaking at 3.1 percent in the third quarter of this year, lower than expected in February.

“Of most significance today is that there is a welcome change in the economic outlook,” King said as he presented his 89th press conference at the central bank in London. “This hasn’t been a typical recession, and it won’t be a typical recovery.”

King said that the more optimistic outlook on both economic growth and inflation was the first such improvement he has been able to forecast since the financial crisis struck. Still, he said risks remain, noting in particular tensions in the euro area, where data today showed the 17-nation economy shrank more than forecast in the first quarter.

“We don’t see a particularly rapid recovery in the next few quarters, but we do see a recovery and I think there are good reasons for that,” King said of the U.K. outlook. “If slow growth in the euro area persists, that is going to make it much more difficult for us to get out of the difficulties that we have.”

Stimulus Unchanged

Today’s report follows the Monetary Policy Committee’s decision to leave its bond-purchase program unchanged at 375 billion pounds ($571 billion) at its meeting last week, a decision taken in light of the new projections.

“At its May meeting, the MPC agreed that a modest and sustained recovery was in prospect,” the BOE said today. “Inflation was likely to remain above the target for much of the next two years, although the risks around the target were broadly balanced in the latter part of the forecast period. Monetary policy remained highly stimulatory.”

The pound was little changed against the dollar at $1.5213 as of 12:14 p.m. London time. Gilts declined, pushing the 10-year yield up 2 basis points to 1.92 percent.

Carney Takeover

The BOE also said the economic recovery remains “weak and uneven” and will be slower than after previous recessions, while the weakness of productivity “may still be weighing on the current effective supply capacity of the economy.”

Today’s report was the last for King before he retires at the end of next month and hands over to Bank of Canada Governor Mark Carney. It was also the first time that the BOE published the data underlying the so-called fan-chart projections after an external review into its operations.

The central bank’s latest forecasts assume a gradual global recovery as the impact of the financial crisis “slowly fade.” They also assume the U.K. unemployment rate falls “only a little.” Data today showed unemployment rose in the first quarter and the number of people in work fell the most in 1 1/2 years.

Joblessness as measured by International Labour Organisation methods increased 15,000 to 2.52 million, a rate of 7.8 percent, the Office for National Statistics said. Payrolls declined by 43,000.

Euro-Area Slump

In the euro area, the recession extended to a record sixth quarter in the three months through March, according to a report today. Gross domestic product fell 0.2 percent after a 0.6 percent decline in the previous quarter. Germany’s economy grew less than forecast, while France slipped into a recession.

The BOE said it sees U.K. inflation slowing to below its 2 percent target in the third quarter of 2015. That compares with a February forecast for the first quarter of 2016. Still, it noted the potential impact that movements in the exchange rate and commodity prices can have on consumer-price growth.

The central bank also said it’s unclear how long inflation can remain above the goal “before it affects public perceptions of the MPC’s determination to keep inflation close to the 2 percent target, with potential implications for wages and prices.”

The BOE’s benchmark interest rate has been at a record-low 0.5 percent since March 2009 and King pointed to market expectations that it will stay below 1 percent for another four years. He said that an improving economy may make it “possible to raise rates sooner than the current market expectation.”

Asked about negative deposit rates, King said the MPC is “in a position where we could implement it if we wanted to, but I think there are some good reasons why we don’t want to.” He said it may not be the most effective form of stimulus and cited the potential impact on smaller banks and building societies.

“If you look at our forecasts for inflation, it’s clear there isn’t a great deal of room for maneuver here,” he said. “We’re cautious, but it’s still an instrument that remains open to the committee if it wishes to use it in the future. It is on the table.”

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