November 14, 2011 / 4:29 PM / 8 years ago

Bank's King to strike gloomy note on economy

LONDON (Reuters) - Bank of England Governor Mervyn King looks set to provide a gloomy outlook for Britain’s economy when he presents the Bank’s quarterly forecasts on Wednesday as the euro zone crisis rumbles on and signs mount of a looming recession.

Clouds hang over the City of London October 12, 2011. REUTERS/Luke MacGregor

The central bank is widely expected to slash its growth forecast for the coming year, and economists are keen to see how far the policymakers think inflation will come down — key for assessing whether more quantitative easing is on the cards.

King already called the current turmoil the worst financial crisis since the 1930s Depression when he explained why the Bank decided in early October to pump another 75 billion pounds into the economy.

Some of his fellow policymakers have already warned against the significant risk of a renewed recession.

The Bank is due to publish its November Quarterly Inflation Report on Wednesday at 0930 GMT, followed by a news conference by King, which will most certainly focus on the escalating euro crisis and its repercussions for Britain.

According to a Reuters poll, the Bank is seen revising down its growth forecasts to an annual rate of 1.5 percent in the final quarter of 2012 and to 2.2 percent a year later, down from around 2.0 and 2.7 percent respectively in August.

The economy grew by 0.5 percent in the third quarter. Since then, surveys have indicated that manufacturing is already contracting, unemployment keeps rising and retailers are suffering as cash-strapped consumers are spending less.

“The Bank has been systematically over-optimistic on the GDP growth profile over the past couple of years, and it will undoubtedly be forced to revise down its 2012 forecast,” said Peter Dixon at Commerzbank.

GDP is seen flat in the current quarter before growing a mere 0.1 percent in early 2012, followed by 0.3 percent growth in the second quarter, according to a Reuters poll published last week which also gave a 40 percent chance of a recession in the next 12 months.

Bank policymaker Adam Posen — who had been lobbying for more asset purchases for a year — said in a recent interview economic growth was likely to be little more than 0.5 percent in 2012.

October’s inflation numbers, due on Tuesday, are already expected to show a slight easing in inflation to 5.1 percent though a number of recent surveys indicated that price pressures could be fading even more quickly.

However, with inflation still more than twice the Bank’s 2 percent target, governor King will have to write an explanatory letter to Chancellor George Osborne, which will provide some insights into the policymakers’ views.


The Bank has held rates at a record low of 0.5 percent since March 2009, and announced last month it was restarting its quantitative easing programme with an additional 75 billion pounds, taking its total purchases to 275 billion pounds.

But with the chance of another downturn growing and the government’s hands tied by its pledge to eliminate the country’s budget deficit of some 10 percent of gross domestic product, the Bank is widely seen stepping up its quantitative easing further.

In a Reuters poll, economists predicted another injection of 50 billion pounds, probably in February, giving a total spend of 325 billion pounds.

“Further policy easing, which likely would take the form of more asset purchases, could be on the cards if the Bank projects weak growth and rapidly receding CPI inflation in the months ahead,” Wells Fargo analysts said in a note.

The Bank is expected to say that inflation will fall steadily to 1.8 percent in two years’ time, reiterating what it said in its August.

Inflation reached a three-year high of 5.2 percent in September, its 21st month above the Bank’s 2 percent target, but is seen dropping back as one-off factors such as a hike in sales tax fall out of the equation.

“The governor will be preparing a robust defence justifying the MPC’s (Monetary Policy Committee) recent decision to sanction more quantitative easing against a backdrop of 5 percent inflation,” said Victoria Cadman at Investec.

“No doubt this forthcoming drop in inflation will be the line the governor will peddle in his press conference.”

Editing by Stephen Nisbet

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