Nov. 14 (Bloomberg) — The Bank of England said the U.K. economy may shrink in the current quarter as it cut its outlook and said growth may be “weaker for longer” due to a bigger impact from the financial crisis.
“The weaker gross domestic product profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed” previously, the central bank said in its quarterly Inflation Report published in London today. “There seems a greater risk that the U.K. economy may be in a period of persistent low growth.”
The Monetary Policy Committee halted expansion of its bond- purchase program last week after some officials raised doubts about the effectiveness of the program and others highlighted inflation risks. A day later, the central bank said it will transfer income from gilts it holds under that program to the Treasury in a move that Governor Mervyn King equates to an easing of monetary conditions.
The central bank said today its new forecasts take into account the impact of that transfer of income to the Treasury. It sees annual quarterly GDP growth of about 2 per cent in two years, according to projections published as fan charts with the report.
The pound pared its advance against the dollar after the report and was trading at $1.5879 as of 10:36 a.m in London, up 0.1 per cent on the day.
It also forecast that inflation will be at about 1.9 per cent at the end of its forecast period and downplayed the potential impact of low productivity growth on prices. While it raised its near-term inflation projections from August, it said the risks to price growth being around the 2 per cent target in the medium term are “broadly balanced.”
“It is judged more liked that the productivity puzzle will be resolved primarily through a rise in output rather than a large decline in employment,” the Bank of England said. “As productivity growth and GDP are projected to move in tandem, differing paths for productivity are judged likely to have limited implications for spare capacity, and hence inflation, at least in the medium term.”
The central bank noted that there is a range of views among the nine-member Monetary Policy Committee for the outlook for inflation.
It said there is a risk of a “small decline” in GDP in the fourth quarter after the economy surged 1 per cent in the three months through September. The recovery will be “sustained, but slow over the next three years,” it said.
The euro-area debt crisis remains the biggest risk to the U.K. economy, according to the central bank. It also said higher energy costs may damp spending, while the government’s fiscal squeeze is also pressuring activity. The recent strength of the pound is affecting companies’ competitiveness, it added.
Data yesterday showed U.K. inflation accelerated more than economists forecast in October due to higher university tuition fees. Consumer prices rose 2.7 per cent from a year earlier, the fastest since May, compared with 2.2 per cent in September.
–Editors: Fergal O’Brien, Andrew Atkinson
To contact the reporter on this story: Scott Hamilton in London at [email protected]
To contact the editor responsible for this story: Craig Stirling at [email protected]
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