Bank of England warns of protracted economic storm blowing in from Europe
BRITAIN’s economy will barely grow this year and may have taken a bigger hit from the eurozone debt crisis than thought, the Bank of England said on Wednesday, but it gave little indication that it would rush to pour further stimulus into the economy.
The BoE resumed its asset buying last month, launching a four-month, £50bn programme with newly created money to keep a lid on borrowing costs and pump more cash into the economy.
Since then, figures have shown Britain’s recession has deepened, with little sign of a hoped-for bounce in activity in July or a boost from the Olympic Games the country is hosting.
"We are navigating rough waters, and storm clouds continue to roll in from the euro area," Bank of England governor Mervyn King told a news conference, presenting the central bank’s latest forecasts.
"Output has contracted in each of the past three quarters, but the underlying data is probably not as weak as the headline data suggests," he said.
Britain is languishing back in recession as government spending cuts, the drag from Europe, bad weather and one-off factors including an extended break for the queen’s Diamond Jubilee celebrations weigh.
The country has not recovered from the financial crisis, and many Britons are worse off as the government’s tax hikes and spending cuts to slash a huge budget deficit as well as soaring prices outpaced meager wage rises and eroded living standards.
If the central bank were to provide further help, Mr King signalled it would come via more money printing rather than cutting interest rates, already at a record low of 0.5%.
"It (cutting interest rates) would damage some financial institutions and would therefore be counterproductive, which is precisely why we haven’t done it," he said.
"I don’t accept the premise of the question that (quantitative easing) asset purchases are having a diminishing effect, I don’t believe that.... They create money in the economy and that can have an effect."
Sterling rose and gilt futures pared gains as markets scaled back bets for further easing.
In its quarterly inflation report, the BoE said that annual growth in two years’ time was likely to be about 2%, down sharply from the forecast of 2.7% just three months ago.
This marks a break with previous forecasts, which have shown strong rebounds in growth, even after short-term weakness.
"Gross domestic product growth in the second half of the forecast period is more likely to be below than above its historical average rate," the central bank said in its inflation report.
The outlook reflected the possibility that the factors contributing to the weakness of growth since the financial crisis may persist, the report said.
The BoE lowered its forecast for inflation for this year but left its midterm inflation forecast nearly unchanged and said the balance of risks to inflation of meeting the 2% target were broadly balanced.
"So that in itself does not suggest an urgent need for further action," Mr King said when asked about the need for further stimulus measures.
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