Bank of England Offers Somber Assessment of British Economy

LONDON — The British economy might shrink again in the fourth quarter as troubles in the euro zone and rising prices take their toll on a fragile recovery, Mervyn A. King, the governor of the Bank of England, said Wednesday.

In a change from the optimism he had expressed lately, Mr. King struck a somber tone while presenting the central bank’s quarterly inflation report, saying growth would be “sluggish” in the near term and inflation would remain above the central bank’s target of 2 percent.

“The immediate economic outlook remains a challenging one,” Mr. King said. “We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while.”

Britain exited a double-dip recession in the third quarter as gross domestic product grew 1 percent in the three months through September. That was welcome, Mr. King said, but cannot be seen as a reliable indication of what to expect because growth in the quarter was helped by the 2012 Summer Olympic Games, which were held in London.

Mr. King acknowledged that the rate at which consumer prices rose recently had not slowed as much as the central bank had hoped, making recovery more difficult.

In fact, annual consumer price inflation moved even further away from the central bank’s 2 percent target in October, rising to 2.7 percent from 2.2 percent in September, in part because of higher university fees.

Higher prices together with pay freezes and tight bank lending have squeezed households, leading to lower spending. Companies are also cautious about hiring workers and increasing investment as long as economies on the European Continent, Britain’s biggest export market, continue to struggle. A rise in the value of the pound against the euro over the past month has added to Britain’s woes by making its exports more expensive on world markets.

Mr. King left open the option of more quantitative easing, the central bank stimulus program that includes buying bonds to inject more capital into the economy. He also hinted that the bank would not increase its benchmark interest rate, which is at a record low of 0.5 percent, any time soon because it would hurt the recovery.

Howard Archer, an economist at IHS Global Insight, said he expected the Bank of England to increase its asset purchasing plan by £50 billion, or $79 billion, to £425 billion in the first four months of next year and keep interest rates unchanged for at least another two years. The central bank last week decided to pause its asset purchases — a decision Mr. King attributed Wednesday to the outlook for inflation.

Mr. King refuted the reservations expressed by some policy makers and economists about the effectiveness of the central bank’s asset purchasing program at making funds available for lending. Paul Tucker and Charles Bean, two Bank of England deputy governors, have hinted in recent speeches that there are doubts about the impact of that type of stimulus on the economic recovery. Some economists suggest that Britain would be better served by policies that would directly improve bank lending.

Mr. King said the central bank committee had “not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”

“The road to recovery will be long and winding,” he said. “But there are good reasons to suppose that we are traveling in the right direction. The committee stands ready to do whatever it can to keep us on the right path.”

Article source: http://www.nytimes.com/2012/11/15/business/global/bank-of-england-offers-somber-assessment-of-uk-economy.html?partner=rss&emc=rss