Bank Of England Downgrades Growth, Inflation Outlook
2011-08-10 17:09:02
The Bank of England on Wednesday trimmed its growth outlook as well as inflation forecast, suggesting that the record low U.K. interest rates are likely to stay for a long time.
Inflation is forecast to fall back through 2012 and into 2013 before rising to 5 percent this year, the central bank said its quarterly Inflation Report. The expected slowdown in inflation is attributed to the downward pressure from the slackness in the labor market and the fading impact of temporary factors that once pushed up inflation.
"The chances of inflation being above or below the 2 percent target in the medium term are judged to be roughly equal," the bank said.
The central bank sees inflation falling below its 2 percent target in the medium term. By early 2013, inflation is expected to slow to 1.8 percent. However, the precise timing and extent of the decline are highly uncertain, it said.
The central bank sees sluggish growth in the near term, mirroring the continuing squeeze on households' real incomes. GDP growth is likely to pick up gradually, but the outlook for output growth remains highly uncertain.
According to the Bank of England, the greatest risks to the prospects for global demand come from the euro area and the substantial challenges faced by several member countries.
GDP growth is seen at around 2.7 percent in 2012, down from 2.8 percent estimated in May. By 2014, growth is likely to be above its historical average than below it, the bank said.
Governor Mervyn King told reporters that headwinds are becoming stronger day by day and the U.K. faces greatest risks from outside world.
"Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy," the bank said.
Instead of a rate hike, economists now see chances of another round of quantitative easing if the crisis continue and the U.K. economy struggles to recover.
Further, the report was prepared before the recent decline in financial markets. ING Bank NV's economist James Knightley said this would probably add to the downside risks to these new numbers.