The Bank of England has cut its UK growth forecast for this year from 1.2 per cent to 0.8 per cent, warning the eurozone crisis remains the biggest threat to the recovery.
The bank’s latest inflation report last week says inflation, which stands at 3.5 per cent CPI, will not fall as quickly as previously thought. It predicts it will remain above the 2 per cent target for the next year.
In February, the bank predicted inflation would fall back to 2 per cent by the end of this year.
King said the biggest risk to the economic recovery comes from the continuing eurozone crisis. He said: “Our biggest trading partner is tearing itself apart without any obvious solution.”
He added that the data does not take into account the impact of the “most extreme possible” outcomes of the eurozone crisis.
On quantitative easing, King said no decisions have been taken. Minutes from the monetary policy committee’s meeting in April show only one of nine committee members, David Miles, was in favour of increasing the asset purchase programme by £25bn. The rest voted to let the existing £325bn package work through the system.
Kames Capital head of fixed income Stephen Jones says more QE is “very much a possibility”. He says: “King appeared as dovish as ever, ready to support the UK with whatever action is necessary.”
Axxis Financial Planning director Owen Wintersgill says: “A solution to Europe’s woes must be found. If countries default or leave the euro, the hit to retail investors is going to be huge.”