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Bank of England forecasts slow UK recovery

THE UK will likely see a "slow" recovery over the next three years, but expansion will be weak by historical standards and output will probably remain below its pre-Great Recession level until 2015.

WORDS OF WARNING: Bank governor Sir Mervyn King said he was concerned by the optimism in global stock markets. Picture: Bloomberg
WORDS OF WARNING: Bank governor Sir Mervyn King said he was concerned by the optimism in global stock markets. Picture: Bloomberg

This is the "best collective judgment" of the Bank of England's Monetary Policy Committee in its latest quarterly inflation report, which underlines the continuing weakness of the UK economy about five years after the onset of the 2008/09 recession.

The Bank warns: "The risks are weighted to the downside, not least because of the challenges facing the euro area."

UK economic output fell 0.3% in the fourth quarter of 2012, official figures have shown.

The latest weak central growth forecasts from the Bank contrast with bullish future expansion projections from the Office for Budget Responsibility (OBR) at the time of George Osborne's debut Budget in 2010. The OBR was set up by the Chancellor to provide independent forecasts.

Meanwhile, Bank of England Governor Sir Mervyn King voiced some concern over the current optimism in global financial markets.

Stock markets have surged in recent weeks, with the UK's FTSE-100 index of leading shares hitting its best levels since early 2008.

Sir Mervyn, who will be succeeded by Mark Carney in the summer, said: "If there is irrational exuberance (on financial markets) it's often evident clearly after the event, and I think there's very little we can do by way of actions to prevent that.

"I am concerned that some of the optimism of financial markets, welcome though it is to have that degree of optimism, may not be consistent with the speed at which the underlying data are likely to change in terms of trade positions and growth, particularly in other countries in the world."

The Bank's latest forecasts also signal further pressure on living standards in the UK, with annual consumer prices index (CPI) inflation predicted to peak at more than 3% around the middle of this year and remain above the 2% target for the next two years.

This underlines the danger of further falls in pay in real terms for many people, amid a raft of earnings freezes and sub-inflation wage and salary rises.

The Bank notes that, while unemployment has "edged lower", it is still "elevated".

Highlighting consequent pressure on pay, it adds: "Labour market slack continues to bear down on pay growth, which remains unusually weak."

The Bank projects annual UK CPI inflation will be about 2.3% on its favoured two-year time horizon, based on market forecasts that base rates will not rise above their current record low of 0.5% before the end of 2014 and on the assumption that quantitative easing (QE) is held at £375 billion.

QE is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds, funded by the issuance of central bank reserves.

However, the Bank signals in the report that it is willing to look through this period of above-target inflation when setting monetary policy.

Referring to the MPC's decision to hold UK base rates at 0.5% and maintain QE at £375bn at its meeting last week, at which the forecasts published yesterday would have been available to MPC members, the inflation report states: "The committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation.

"It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit-protracted, period of above-target inflation.

"Attempting to bring inflation back to the target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term."

The Bank projects annual CPI inflation will return to the 2% target by the end of 2015.

Referring to the February MPC meeting, the report says: "The committee agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation."

Vicky Redwood, chief UK economist at consultancy Capital Economics, noted that the Bank's latest forecasts for UK gross domestic product growth seemed "largely unchanged", at around 1% this year and 2% in 2014.

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Finance

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