Bank downgrades UK growth prospects

11 August 2010 0:00 am | Updated: 11 August 2010 10:56 am | By Lee Jones

The Bank of England has downgraded the UK’s growth prospects as governor Mervyn King warns of “choppy” years of recovery.

The Bank now expects the economy to grow by 2.5 per cent in 2011, down from its previous forecast of 3.4 per cent, according to its latest Inflation Report.

King also admits inflation would fall over the next two years below the 2 per cent target even if the Monetary Policy Committee retains the all-time low base rate of 0.5 per cent.

King points to a lack of bank lending as one reason for limited economic growth. He also warns that the UK faces a move from private and public consumption to that of net exports.

He says: “It will take many years before bank balance sheets and fiscal positions return to anything like normal. In the meantime they will act as headwinds to the recovery.”

Travelex UK trading desk head Mark Bolsom says: “Today’s Inflation report has been a bit of a reality check. The preliminary reading of Q2’s GDP figure had put the markets in a good mood, as it looked like the economy was back on track.
 
“But King was unequivocal in his belief today that the bias of policy was leaning towards additional quantitative easing, rather than monetary tightening. This confirms the view that the economy is not out of the woods yet, and we’re not in a position to withdraw stimulus or even tighten monetary policy.”

This comes after the US Federal Reserve also downgraded its own growth prospects and continued with loose monetary policy.

In reaction to the governor’s comments, the Pound slid more than 1 per cent against the Dollar to $1.5680 and fell to 83.06p against the Euro.

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