Cut in UK's growth forecast
Source: Agencies |
August 11, 2011, Thursday
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Print Edition
Print Edition
THE Bank of England has downgraded its growth forecast for 2011 on a combination of waning global growth and sluggish domestic demand, and indicated that interest rates will be staying low for a while to come, to the likely relief of homeowners and businesses.
The central bank said yesterday in its quarterly inflation report that it now predicted growth of 1.4 percent this year, down from the previous forecast of 1.8 percent. It said it would rise to an annual rate of around 2.7 percent in two years.
"There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang," Governor Mervyn King said. "And these headwinds are becoming stronger by the day."
In addition, the BOE said inflation in Britain has a "good chance" of hitting 5 percent this year as higher utility bills feed through but that it will likely fall back sharply next year.
Though inflation is well above the central bank's 2 percent target, rate-setters have kept the main interest rate unchanged at the record low of 0.5 percent as economic growth remains subdued at a time when the government is enacting big austerity measures.
The BOE warned in its report that "the squeeze in household real incomes is likely to continue to weigh on domestic demand."
King said the biggest risks for the world economy are coming from the eurozone, which is grappling with a severe debt crisis that has already seen three countries bailed out and has recently threatened Italy and Spain.
He conceded that the BOE has room to ease monetary policy further, including expanding its asset purchase program. On Tuesday, the United States Federal Reserve said it would also consider a further monetary stimulus if the economy continued to be weak.
The BOE has already undertaken a 200 billion pound (US$325 billion) asset purchase program to boost the money supply - so-called quantitative easing, or QE - after running out of room to maneuver on rates once the benchmark rate had been cut to 0.5 percent in March 2009 to counter the effects of the financial crisis and the ensuing recession.
August's Bank of England Inflation Report echoed Tuesday's message from the Fed that interest rates are likely to stay very low for a long time yet, according to Vicky Redwood, senior UK economist at Capital Economics.
The central bank said yesterday in its quarterly inflation report that it now predicted growth of 1.4 percent this year, down from the previous forecast of 1.8 percent. It said it would rise to an annual rate of around 2.7 percent in two years.
"There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang," Governor Mervyn King said. "And these headwinds are becoming stronger by the day."
In addition, the BOE said inflation in Britain has a "good chance" of hitting 5 percent this year as higher utility bills feed through but that it will likely fall back sharply next year.
Though inflation is well above the central bank's 2 percent target, rate-setters have kept the main interest rate unchanged at the record low of 0.5 percent as economic growth remains subdued at a time when the government is enacting big austerity measures.
The BOE warned in its report that "the squeeze in household real incomes is likely to continue to weigh on domestic demand."
King said the biggest risks for the world economy are coming from the eurozone, which is grappling with a severe debt crisis that has already seen three countries bailed out and has recently threatened Italy and Spain.
He conceded that the BOE has room to ease monetary policy further, including expanding its asset purchase program. On Tuesday, the United States Federal Reserve said it would also consider a further monetary stimulus if the economy continued to be weak.
The BOE has already undertaken a 200 billion pound (US$325 billion) asset purchase program to boost the money supply - so-called quantitative easing, or QE - after running out of room to maneuver on rates once the benchmark rate had been cut to 0.5 percent in March 2009 to counter the effects of the financial crisis and the ensuing recession.
August's Bank of England Inflation Report echoed Tuesday's message from the Fed that interest rates are likely to stay very low for a long time yet, according to Vicky Redwood, senior UK economist at Capital Economics.
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