June 26, 2012 / 9:51 AM / 5 years ago

Gloomy BoE sees outlook darken

LONDON (Reuters) - Britain’s economic outlook has worsened markedly in the space of just six weeks due to the deepening euro zone crisis and signs that a global slowdown is taking root in the United States and emerging markets, the Bank of England said on Tuesday.

<p>The Governor of the Bank of England, Mervyn King, leaves Downing Street in central London May 28, 2012. REUTERS/Neil Hall</p>

Bank Governor Mervyn King told legislators the world is not yet halfway through the financial crisis that began in 2008, and that Britain risked a downward spiral as businesses continue to put off investment due to the turmoil in the euro zone.

His comments bolster expectations that the Bank will launch a new round of asset purchases next month under its quantitative easing programme, and suggested the central bank and British government may need to come up with further measures. ᠀ Evoking the depression-ridden 1930s, King said it would be difficult to overcome the hit to confidence from the “black cloud” of uncertainty with consumer and business spending alone.

“We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with,” King told parliament’s Treasury Committee.

Britain’s economy slipped into its second recession since the start of the financial crisis around the turn of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the euro zone crisis.

The government and Bank announced two schemes on June 14 to get credit flowing through the economy, but Chancellor George Osborne remains under pressure to increase spending to jump-start growth. Osborne announced on Tuesday that he would cancel a planned rise in fuel duty, providing some relief for hard-pressed consumers and businesses.

An unexpected leap in borrowing in May, however, highlighted the constraints for the government, which has pledged to erase a budget deficit still at around 8 percent of GDP.

Speaking two days before a European Union summit at which measures to spur growth will be a focus, King called on euro zone countries to finally accept that some of the huge debt pile will never be paid back.

“I am pessimistic (about the euro zone outlook). I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road,” King said.

“In the last six weeks ... I am very struck by how much has changed since we produced our May Inflation Report,” he added.

GLOBAL WORRIES

Earlier this month, the central bank’s Monetary Policy Committee voted 5-4 against buying more government bonds with newly created money to boost the economy. King was one of those favouring buying another 50 billion pounds of gilts, to take the total to 375 billion pounds.

“The remarks of Sir Mervyn King and other MPC members are pretty grim, and fan belief that the Bank is likely to pull the Quantitative Easing lever again in July,” said IHS Global Insight economist Howard Archer.

Policymakers Ben Broadbent and Spencer Dale - who both voted against more stimulus in June - and David Miles all identified the euro zone debt crisis as the main threat to Britain’s economy in their annual reports to parliament.

Chief economist Dale said he thought easing credit costs might be a better option to help the economy, while Broadbent also said he would take new schemes designed to do so into account when deciding how to vote next month.

The new ‘funding for lending’ scheme - designed to lower banks’ funding costs in return for more lending to companies and households by allowing them to swap illiquid assets for more liquid ones - should be up and running within weeks, King said.

LASTING DAMAGE?

Britain has not recovered from the 2008/2009 slump, which left many Britons worse off. Now, fears are rising that a prolonged recession will do lasting damage to the economy.

“What has particularly concerned me in the last several months - why I have voted for more easing policy - was my concern about the worsening I see in the position in Asia and other emerging markets,” King said.

“And my colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy,” he added.

The central bank governor remained adamant that QE cash injections could still stimulate the economy.

“We haven’t run out of road in terms of our basic policy weapon, asset purchases, and we are prepared to use that if necessary,” King said.

But he agreed with the view of the Bank for International Settlements - published in its annual report on Sunday - that ultra-low interest rates pose dangers in the long run, and said monetary policy alone would not end the crisis.

Additional reporting by Fiona Shaikh, Olesya Dmitracova, Pete Griffiths and Matt Falloon; Editing by Catherine Evans

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