UK: Bank of England slashes growth forecast to zero

THE Bank of England today slashed its economic growth forecast for 2012 to around zero, from around 0.8% in its May estimate.

And the rate of inflation is now expected to hit the Government’s 2% target towards the end of this year, earlier than previously expected, and could slow further to around 1.5% towards the end of 2013, the Bank said.

Bank of England governor Sir Mervyn King said the underlying picture is that output has been at best “broadly flat” over the past two years and has “continually disappointed” expectations of a recovery.

In its quarterly inflation report, the bank slashed its growth forecasts for both 2012 and 2013, with the economy now expected to grow by around 1.9% next year, compared with 2.4% in its last estimate.

The downbeat outlook will increase the chances of further emergency support measures, including a possible interest rate cut beyond the current record low of 0.5% and a further cash injection to the bank’s quantitative easing programme to boost the money supply.

In a boost to borrowers, the bank signalled that it did not expect interest rates to rise above 0.5% until 2015.

Presenting the gloomy report, Sir Mervyn said: “The underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed of a recovery.”

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Sir Mervyn warned that the UK was “navigating rough waters and storm clouds continue to roll in from the euro area”.

But he said the contraction in output over the last three quarters, signalling the longest double-dip recession since the 1950s, is probably not as weak as suggested.

He said the extra bank holiday in June for the Diamond Jubilee celebrations will have reduced output by around 0.5 percentage points and should unwind in the third quarter.

The governor also raised doubts over the accuracy of official construction figures which are “at odds” with other survey data.

Sir Mervyn said early indications on the �80billion “funding for lending” scheme to unclog the flow of credit were positive, with some banks cutting their loan rates.

But he warned: “The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro area and a broader slowing in the world economy.”

The euro area is hitting demand for UK exports and efforts to rebalance the economy “will require patience”, Sir Mervyn said.

“GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period. As I have said many times, the recovery and rebalancing of our economy will be a long, slow process.”

The bank’s report said the near-term outlook for inflation is lower than three months ago, reflecting weakness in price pressures and falling energy prices.

Oil prices are around 7% lower in the run-up to the August report than in the run-up to the May report.

The bank reiterated its concerns over the threat of the eurozone crisis to UK growth, and the need for an effective policy response from eurozone finance ministers.

Its assumptions are all based on market expectations of a rate cut to 0.25% in the next year, but Sir Mervyn said a cut was not a move the bank would “contemplate immediately” as it would damage some financial institutions.

Looking ahead, Monetary Policy Committee member Spencer Dale said the Olympics should have a small positive contribution to the economy in the third quarter between July and September.

He said the lift would come from ticket sales and TV rights, while extra spending from tourism would be offset by travel disruption and Britons leaving the UK for holiday.

Vicky Redwood, chief UK economist at Capital Economics, said: “The door is clearly open to more stimulus and we still expect both more QE and a further interest rate cut in November.”