Bank cuts UK growth forecast
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Bank of England governor Mervyn King has cut its 2011 growth forecast for the UK to around 1.5% from 1.8%, due in part to the debt crisis in Europe.
King says there are a number of headwinds to world and domestic growth over the forecast period and these headwinds are becoming stronger by the day.
In the Bank’s inflation report, he says: “Reflecting this, and the prolonged period of economic adjustment facing some countries, the MPC’s projections embody relatively slow growth in the euro area.
“The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks which are contributing to high borrowing spreads, tight credit conditions for households and smaller companies, and exceptionally weak credit and money growth in the UK.”
King says the outlook for output growth remains highly uncertain and the greatest risks to the prospects for global demand come from the challenges faced by several member countries as they seek to ensure the sustainability of their fiscal positions and to preserve the stability of their banking systems.
He adds: “Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy. To the extent that such risks are already reflected in asset prices, bank funding costs and confidence, they will be captured in the MPC’s projections.”
But King says there is a limit to what UK monetary policy can do when large real adjustments are required and it cannot influence inflation over the next few months.
He adds: “We must work with our colleagues abroad to tackle the challenge of how to reduce the overhang of private and public debt. But there is a limit to what UK monetary policy can do when large real adjustments are required.
“And it cannot influence inflation over the next few months. But it can ensure that policy is set in such a way that these adjustments take place against a backdrop of low and stable inflation. And that is exactly what the MPC will do.”
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