THE poor UK economic outlook is underlined in the Bank of England's latest quarterly inflation report, which signals base rates will remain at a record low of 0.5% for many more months and possibly even for years.
The Bank projected annual UK consumer prices index inflation would be below the 2% target on its chosen two-year time horizon, even if base rates remain at 0.5% and the scale of its quantitative easing boost stays at £325 billion.
QE, through which the Bank creates new money to buy Government and corporate bonds, is aimed at boosting the amount of money circulating and stimulating economic activity. The scale of this programme was hiked by £50bn to £325bn only last week.
In its inflation report, which is drawn up by staff on Threadneedle Street under the guidance of members of the rate-setting Monetary Policy Committee, the Bank highlights the eurozone debt trouble as the "most significant threat" to UK economic recovery.
It warns UK gross domestic product growth "is likely to remain weak in the near term".
Although projecting a gradual strengthening of growth "as households' real incomes recover", the Bank warns UK Government spending cuts and tax rises and tight credit conditions are "likely to act as brakes on growth".
It adds: "The drag on domestic spending from tight credit conditions and the fiscal consolidation is likely to persist."
Bank Governor Sir Mervyn King said: "We are very conscious that credit conditions, if anything, are still tightening for small businesses".
Sir Mervyn described this week's warning from international agency Moody's that it could cut the UK's sovereign credit rating from AAA as "a reminder we are facing a very challenging path to reduce the scale of our deficit".
Declaring "recovery to date has been weak", the Bank forecasts UK economic output is "unlikely to return to its pre-crisis level" until 2013.
UK GDP shrank by 0.2% in the fourth quarter of 2011. This has fuelled fears of a "double-dip" recession, which would occur if there was a second consecutive quarter of contraction in the three months to March.
Brian Ashcroft, emeritus professor of economics at Strathclyde University, voiced his belief late last month that official data due in April would show the Scottish economy suffered a similar fall in output to that in the UK as a whole in the fourth quarter of last year.
The Bank notes in its latest inflation report that the MPC "sees no meaningful way to quantify the size and likelihood of the most extreme outcomes associated with developments in the euro area" and that these are therefore excluded from its fan-chart projections. It is forecasting GDP will in the first half of 2012 be only marginally higher than a year earlier, although it projects a subsequent recovery in year-on-year growth rates.
The fact that the Bank yesterday forecast less of an undershoot of the 2% inflation target two years out than it did in its November report was taken by economists as a signal that it is in no rush to increase further the scale of its QE programme.
But Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "The committee's forecasts for economic growth still look very optimistic, with the MPC expecting growth to accelerate to about 3% by the end of next year.
"This optimism partly reflects the fact that the MPC is still not factoring in any of the 'extreme risks associated with developments in the euro area'. If growth is much weaker, as we expect, then QE is still likely to be extended further this year."
James Knightley, economist at banking group ING, highlighted further signs in the inflation report that the Bank is not looking to raise interest rates in the foreseeable future.
Mr Knightley said: "They (the Bank) appear to be backing up the markets' assumption that we won't see policy tightening for at least another two years."
He expects further QE in coming months.
Ross Walker, economist at Royal Bank of Scotland, said of the inflation report: "The policy signal we read into this is that they're keeping open the door for further QE. But it's more likely to come later, rather than sooner, so the second half of this year rather than in the next inflation report month in May. We stick with our forecast for £50bn (more) in August."
European Commission data yesterday showed the Italian and Dutch economies fell into recession in the final three months of 2011 with each suffering a 0.7% fall in GDP – their second consecutive quarter of contraction. Wider eurozone GDP fell 0.3% in the fourth quarter, having grown by 0.1% in the preceding three months.
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