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King: UK Growth Stalling as Bank of England Signals Stimulus Increase

Wednesday, 16 November 2011 07:09 AM

Bank of England Governor Mervyn King said Britain faces a “markedly weaker” outlook for economic growth and persistent danger from Europe’s debt crisis, as policy makers signaled they may need to expand stimulus further.

“Despite the easier monetary stance, growth over the next few quarters is likely to be markedly weaker than in the August projection” and may be “broadly flat” in the first half of 2012, King told reporters in London today as he presented the quarterly Inflation Report. “There is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area.”

The Bank of England is in the second month of a program of bond purchases aimed at shielding the U.K. economy from the fallout from Europe’s debt crisis. Policy makers said today that failure by European officials to resolve the turmoil could lead to “significant adverse effects” on the global economy.

“The prospects for the U.K. have worsened,” the central bank said in its report. Based on its current 275 billion-pound ($433 billion) bond program remaining unchanged, inflation may fall below the 2 percent target in two years, signaling that officials may need to increase the stimulus plan.

U.K. 10-year gilts rose after the release of the report, with the benchmark generic bond yield of that maturity trading down 2 basis points at 2.14 percent as of 11:10 a.m. today in London. The pound was down 0.4 percent at $1.5767.

Growth Outlook

The central bank sees inflation at about 1.5 percent in two years, according to the Inflation Report. It sees annual gross- domestic-product growth at about 3.1 percent. At its trough in mid-2012, annual economic growth will be about 0.9 percent. The forecasts today were published in the form of fan charts and the data underlying the charts will be released next week.

The forecasts are based on the bond-purchase target staying at the level set in October and market expectations for interest rates. Those don’t show an interest-rate increase fully priced in until 2014. The benchmark is currently 0.5 percent.

When it expanded so-called quantitative easing in October, King cited strains in financial markets. The central bank said today that “although banks have faced difficulties in obtaining funding, that is likely to have happened too recently” to impact credit availability. “If they persist, the strains in bank-funding markets may lead to a contraction in the supply of bank credit.”

Debt Turmoil

Europe’s debt turmoil has spread to Italy, sending its bond yields to a level that led Greece, Ireland and Portugal to seek bailouts. While the region’s leaders agreed on Oct. 26 to beef up the region’s rescue fund, they have yet to flesh out details of the plan.

“Implementation of a credible and effective policy response in the euro area would help to reduce uncertainty and so support U.K. growth,” the Bank of England said. “Its absence poses the single biggest risk to the domestic recovery.”

The package of measures announced last month “briefly led to some lessening in the immediate pressures on the most vulnerable euro area countries,” officials said. “But that subsequently reversed.”

In addition to the euro crisis, which is hampering growth in Britain’s biggest trading partner, the U.K. recovery is being restrained by the government’s fiscal squeeze, the biggest since World War II.

Growth Acceleration

Britain’s economic growth accelerated to 0.5 percent in the third quarter from 0.1 percent in the previous three months. Still, recent data indicate that pace of expansion may not be maintained. Surveys this month showed manufacturing output shrank in October and services growth cooled, while data today showed unemployment rose in the three months through September as joblessness among young people climbed above 1 million for the first time since at least 1992.

The European Commission cut its forecasts for the U.K. economy on Nov. 10 and said there’s a risk of “at least” one quarter of contraction. Gross domestic product will increase 0.7 percent this year and 0.6 percent in 2012, the Brussels-based commission said, compared with earlier forecasts of 1.1 percent and 2.1 percent respectively. It predicted the economy will grow 1.5 percent in 2013.

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Bank of England Governor Mervyn King said Britain faces a markedly weaker outlook for economic growth and persistent danger from Europe s debt crisis, as policy makers signaled they may need to expand stimulus further. Despite the easier monetary stance, growth over the...
Wednesday, 16 November 2011 07:09 AM
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