Bank fails to douse recession fears

The Bank of England has got a lot gloomier about the UK economy's prospects for the coming year...

Last Updated: 31 Aug 2010

In its latest quarterly Inflation Report, the Bank of England admitted that the UK’s near-term inflation outlook ‘has deteriorated since May, reflecting the news about food and energy prices’. With the Consumer Prices Index now at 4.4%, well above the Government’s 2% target, Governor Mervyn King is now expecting UK growth to stay pretty flat at best over the next year. That means there’s a good chance of two consecutive quarters of negative growth – better known as a recession.

‘It may still - just - be summer but there is a feeling of chill in the economic air,’ said King this morning (with a possibly inappropriate degree of lyricism). ‘The British economy is going through a difficult and painful adjustment… [which] cannot be avoided. And as a result, inflation is rising and growth is slowing,’ he warned.

He also reckons that the current estimate for GDP growth in the second quarter of 2008 – a measly 0.2% – may turn out to be overly-optimistic. In fact, he doesn’t seem to think there’s much chance of any growth at all in the coming year – so he’d presumably take exception to the Treasury’s current growth forecasts of 1.75%-2.25% this year and 2.25%-2.75% next year….

The Bank’s report follows yesterday’s announcement by the Office of National Statistics that rising food prices have pushed the Consumer Prices Index up to an eye-watering 4.4%. And things will get worse before they get better – King said today that inflation was likely to peak at around 5% in the coming months, as the recent hikes to energy bills come into effect. This means the Bank will have very little scope to cut interest rates any time soon.

However, painful though the next year will undoubtedly be, King was still fairly bullish about our longer-term prospects. He reckons that if the Bank holds interest rates at the current rate of 5%, the CPI rate of inflation should fall back to the 2% target within two years as the economy slows and the oil price calms down a bit (thus allowing the Bank to cut rates).

That’s much faster than most people are expecting – and given the constant stream of economic bad tidings (today the official unemployment rate jumped to 5.4%), we admire his optimism...

In today's bulletin:
Bank fails to douse recession fears
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Editor's blog: The price isn't right  
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