Don't expect economic recovery soon, warns BoE
The Bank of England has admitted that the economy will take longer to recover than expected.
In its latest quarterly Inflation Report, the central bank predicts that economic growth will reach about 3.2% in the second quarter of 2011 - weaker than an earlier prediction of 4%.
Inflation, meanwhile, is forecast to peak at 3.3% before easing to 0.9% and staying below the Bank of England's 2% medium-term target.
The economy only grew by 0.1% in the final three months of 2009, despite the record-low level of interest rates.
The Bank of England governor Mervyn King says the economy will "bump along the bottom", although he is hopeful of a "gradual recovery" in output.
Economists are also cautious over the outlook for the UK following the latest report.
Mark Bolsom, head of the UK trading desk at Travelex, says: "The Monetary Policy Committee continues to sit on the fence with this report. While it says that a gradual recovery is in place and further stimulus is not needed right now, it is clear it does not have overwhelming confidence in sustainable economic recovery."
Jonathan Loynes, chief European economist at Capital Economics, adds: "The Bank of England's February Inflation Report looks distinctly dovish and will raise questions over why the Monetary Policy Committee did not extend its quantitative easing programme further last week."
The Bank of England has injected £200 billion into the economy through quantitative easing although it chose to bring this process to a close earlier this month. However, it has not ruled out further action with economists believing more could be on the cards.
Loynes says: "Further policy support may yet be needed, whether that is more quantitative easing - the governor said it was far too soon to conclude that no more asset purchases would be made - or other forms of support. Either way, any tightening of monetary policy - conventional or unconventional - is a long way off."
Graeme Leach, chief economist at the Institute of Directors, says" "We agree with the governor of the Bank of England that it is far too soon to conclude that a further extension in quantitative easing won't be required.
"We think that it will and that the risk of a double-dip or even a triple-tumble recession and recovery remains high."
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).