Poll - Economy to limp through 2013, no more QE

LONDON Thu Nov 15, 2012 5:16pm GMT

Governor of the Bank of England Mervyn King speaks at a business conference in London July 26, 2012. REUTERS/Alastair Grant/Pool

Governor of the Bank of England Mervyn King speaks at a business conference in London July 26, 2012.

Credit: Reuters/Alastair Grant/Pool

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LONDON (Reuters) - Britain's economy will barely grow in the current quarter and will expand only slightly more than 1 percent next year, half the expected rate of inflation, a Reuters poll showed on Thursday.

Rapidly-rising consumer prices, which are crimping spending power for Britons because they are going up faster than wages, also mean that the Bank of England has probably shelved its money-printing campaign at 375 billion pounds.

The latest Reuters consensus view, published a day after the central bank painted one of the most pessimistic economic forecasts since it was granted monetary independence in 1997, is little changed from one month ago.

Just 0.1 percent growth expected during September-December and 0.2 percent in the first three months of next year is the most downbeat outlook since Reuters began polling on these periods more than a year ago.

The central bank's outlook and the Reuters poll solidify the widespread perception among economists that the spurt of growth in the third quarter driven by the London 2012 Olympic Games was fleeting.

But after holding its quantitative easing government bond purchases programme steady this month, there is only a median 45 percent chance the Bank buys any more, the poll suggested.

"Never say never, but if there was no point in doing it this month why do it again in the next three months?" asked Alan Clarke, economist and bond strategist at Scotiabank, who puts less than a one-in-three chance of another round of QE.

Its decision to halt comes mainly because of the decision taken by the UK government, and agreed by the Bank, to transfer back to the government the interest the central bank had received on the bonds it has already bought.

That amount, 37 billion pounds, is a significant stimulus, roughly the size of annual UK public sector net borrowing before the financial crisis began.

As such it makes a major improvement to the UK government's fiscal position ahead of the autumn Budget statement.

Before this transfer of cash over to the government was announced, economists had been expecting another 50 billion worth of government bond purchases by the Bank.

INFLATION ON THE RISE

The latest Reuters poll also showed the highest consensus forecasts for inflation for the coming four quarters since polling began for these periods, with 2.4 percent for Q4, followed by 2.3, 2.4, and 2.3 percent.

The Bank, which targets inflation at 2.0 percent, is clearly feeling uncomfortable with the spot it finds itself in and made that public at a press conference on Wednesday.

"We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while," Bank Governor Mervyn King told journalists.

That is another reason for the Bank to stop buying bonds, which tends to be inflationary and in theory at least, ought to erode the value of the currency as it lifts the money supply.

A debate is now raging in Britain over how badly the government's fiscal austerity is damaging the economy, albeit less severely than in Greece or Spain, which are suffering swingeing tax rises, spending cuts and mass unemployment.

In the meantime, demand for UK exports from the euro zone, Britain's main trading partner, is also withering, in part because of austerity there.

That leaves little reason to hope for an export-driven rebound, no matter how weak the pound may be.

Indeed, Britain's economy is expected to grow at half the speed of another of its major trading partners, the United States.

(Polling and analysis by Ruby Cherian and Namrata Anchan. Editing by Jeremy Gaunt.)

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