Bank urged to be cautious on recovery

BUSINESS leaders have warned Bank of England governor Mervyn King that it remains over optimistic on economic growth despite the Bank downgrading its forecasts.

The Bank now expects GDP to grow by around 2.5% in 2011, having predicted in May that the figure would be closer to 3.5%.

However, the Bank’s revision was not enough for many economists and business groups who continue to view the recovery as far more fragile and fear concerns about inflation could lead the Monetary Policy Committee to prematurely raise interest rates from their current record low.

Graeme Leach, chief economist at the Institute of Directors, said: “Although we agree with the Bank’s general approach to monetary policy, we still take a more cautious view on GDP growth than the Bank despite its forecast downgrade today.

“We are also more optimistic than the Bank on inflation and expect that it will slip back over the course of 2011 with the shakeout in the labour market putting more downward pressure on wage growth.”

The Bank’s latest Inflation Report described the prospects for inflation were “highly uncertain” but at its last meeting the MPC had “judged that the recovery was likely to continue”.

Lai Wah Co, head of economic analysis at the CBI, said: “The Bank’s latest Inflation Report highlights the significant uncertainties in the outlook for UK growth and inflation over the next couple of years.

“The Bank’s growth forecast has been lowered to reflect the fiscal consolidation announced in the emergency Budget. But further signs of a softening in the pace of the global recovery over recent weeks will have increased the downward risks to UK growth.

“Meanwhile, although UK inflation is starting to come down, it has been surprisingly high over the past year. It is unclear whether inflation expectations will continue to creep up, especially as the January VAT rise is likely to leave it above target throughout 2011.”