Worrying news that the British economy is dangerously close to contraction surfaced today as the Bank of England slashed its growth forecasts.
In its Inflation Report, delivered quarterly, the Bank indicated that inflation will fall well below target to 1.3 percent in just two year’s time. By the end of 2012, the Bank predicts that inflation will finally hit below the target of 2 percent.
Analysts say that this outlook on inflation greatly increases the chances of more stimulus, and the Bank has also indicated that it may consider adding to its already 275 billion pound asset purchasing programme.
Economists generally predict that the Bank will pour another 50 billion pounds into the economy, in a measure called quantitative easing (QE). The cash is injected into the economy through the purchase of long-term government bonds, which helps keep interest low for borrowers but hurts savers over the long run.
The measures also historically see a resulting rise in inflation rates, provoking anger and criticism from special interest groups such as Save Our Savers and Age UK. Pensioners are particularly hurt by the Bank of England’s measures to save the economy, as the buy-up on gilts depresses pension payouts, while inflation typically hurts pensioners more than the general public.
Despite strong criticism, further stimulus will most likely be needed, as a spokesperson from the Bank said that the UK’s economic prospects have worsened.
The Bank attributes the slashed economic outlook to concerns about the eurozone, and increasing strains in banking. Investors are fuelling fears about the solvency of several European governments, though markets should rally when the new Italian Prime Minister Mario Monti announces the concrete makeup of his new government.
Still, the outlook in the longer-term looks to be broadly flat, says the Bank. This is particularly true for the final fiscal quarter of this year.
The Bank continues to forecast growth at the end of the two-year predicted period of stagnation. By the end of 2013, growth should be seen at around 3.1%, says the Bank of England.
However, it also admitted that the Monetary Policy Committee houses a range of views about the strength of the recovery, as well as the risks to inflation.