The Bank of England has slashed its 2012 growth forecasts for the UK economy, raised its near-term inflation outlook and issued a warning about the potential economic damage the eurozone sovereign debt crisis could inflict.
In its quarterly Inflation Report yesterday the Bank's Monetary Policy Committee lowered its estimate of economic growth over this year from 1.2 per cent to 0.8 per cent, bringing it slightly closer to the consensus of private sector economists.
The MPC also forecast that consumer price inflation will remain well above the Bank's 2 per cent target until the middle of next year. But the MPC lowered its estimate of the rate of inflation at the end of its two-year horizon period to 1.6 per cent. This leaves the door open for more monetary stimulus to assist the economy in the coming months if it judges that to be necessary.
Simon Wells at HSBC said: "With inflation further below target and an even slower and more protracted recovery in growth on the cards, we think the MPC will feel confident to do more quantitative easing later in the year."
Last week the MPC voted against increasing its £325bn asset purchase programme, despite the Office for National Statistics reporting in April that the British economy fell into a double dip recession, contracting by 0.2 per cent in the first three months of the year.
The Bank's Governor, Sir Mervyn King, admitted that the outlook for the UK economy had turned out to be slightly worse than the MPC forecast in its last inflation report in February. But he repeated his long-standing view that falling inflation would alleviate the squeeze on incomes later this year and boost consumer spending. "The big picture remains one in which the economy gradually recovers" he said.
However, Sir Mervyn also warned that the uncertainty generated by the eurozone crisis would continue to hamper the UK recovery by weakening the banking sector. "Underlying concerns about balance sheets, especially in the financial sector with its exposure to the euro area, mean that the path of recovery is likely to be slow and uncertain" he said.
"We have been through a big global financial crisis; the biggest downturn in world output since the 1930s; the biggest banking crisis in this country's history; the biggest fiscal deficit in our peacetime history; and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution. The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2 per cent strikes me as wholly unrealistic."
Sir Mervyn also hinted that the MPC would be prepared to act if the crisis lurched out of control. "If there were to be major developments, there are all sorts of ways you'd respond. I don't want to restrict it to the asset purchase programme" he said.
Separately, official figures showed that unemployment fell in April by 45,000, taking the headline jobless rate down to 8.2 per cent. The number of people claiming benefits also fell by 13,700. However, this improvement was largely driven by an increase in the number in part-time work: the total number was 7.99 million in January to March, up 118,000 compared with the previous three-month period between October and December, according to the ONS.