Bank of England cuts growth rate forecast amid gathering gloom
THE Bank of England has cut its growth forecasts for the year and warned that CPI inflation could hit 5%.
However, the latest Inflation Report continues to forecast that inflation will fall away in 2012 and 2013 suggesting the Monetary Policy Committee will maintain its stance on interest rates for months to come.
The report said that GDP growth would remain “sluggish” in the near term reflecting the squeeze on household incomes. The Bank is now forecasting GDP growth of around 1.4% compared to its previous prediction of 1.8%.
Mark Smith, regional chairman at PwC in the Midlands, said: “This should surprise no one. Manufacturing contracted in July for the first time in two years, public spending cuts are starting to bite and consumer confidence is in the doldrums.
“It is now almost certain that interest rates will remain at around 0.5% for the foreseeable future, offering some relief to borrowers and business and to the mortgage market.
“However, given the continued fiscal squeeze and continued volatility in global financial markets, the pace of recovery is likely to remain sluggish into 2012.”
He said the UK may still avoid a serious double dip recession, but this may force the Bank of England to trigger a further round of quantitative easing at some point over the next year.
David Kern, chief economist at the British Chambers of Commerce, said: “The MPC has downgraded its growth forecast, but we believe this is still too optimistic. It is unlikely that annual GDP growth in the fourth quarter of this year will increase to 2%, and the pace of economic expansion predicted for 2012 also seems high. However, we agree that growth will remain in positive territory and there will be no double dip recession.
“The inflation forecast is broadly in line with our own; that after rising further in the near term annual inflation will fall steadily during 2012. The forecast by the Committee implies that interest rates will remain at their current low level for an extended period, possibly beyond the second quarter of next year. Given the expected low growth and the squeeze facing businesses and consumers, it is important that interest rates remain low for as long as possible.”
Presenting the report, governor Sir Mervyn King said the main challenges to the UK economy came from the rest of the world including the Eurozone crisis and falling confidence in the US recovery.
But, amid suggestions that the Bank may embark on an expansion of its quantitative easing programme, he warned there was a limit to the impact monetary policy could have in a situation where “large real adjustments are required”.
Richard Woolhouse, CBI head of fiscal policy, said: “The Bank has lowered its expectations for growth for 2011, but predicts a gradual pick up next year, albeit with the pace remaining modest.
“This is similar to the CBI’s latest economic forecast, which predicted GDP growth of 1.3% in 2011 and slightly stronger growth the following year of 2.2%, as business investment strengthens and net trade makes a solid contribution.
“But as the Bank emphasised, uncertain global economic conditions are a significant risk to the outlook.”
Earlier in the week the US Federal Reserve signalled it was likely to keep interest rates at “exceptionally low levels” until the middle of 2013.
