Dark Clouds Gathering on British Economy, Central Banker Says

LONDON — The governor of the Bank of England, Mervyn A. King, gave a gloomy outlook for the British economy on Wednesday, but said he would not make a vow like the one by the U.S. Federal Reserve to keep short-term interest rates near zero for some time.

Mr. King said higher inflation and a deterioration of the British economy had squeezed households’ finances more than expected. The central bank cut its economic growth forecast for this year to 1.4 percent from 1.8 percent previously. Britain’s economy barely grew in the second quarter, and interest rates have remained at a record low of 0.5 percent since March 2009.

“The mood in markets has taken a sharp turn for the worse,” Mr. King said in a speech after the publication of the bank’s inflation report.

“Headwinds are becoming stronger by the day,” he said. “The weakness in underlying activity is likely to be somewhat more persistent than previously expected.”

Mr. King blamed the deterioration of the economy on problems faced by some countries that share the euro to repay their debt and on the outlook for growth and fiscal policy in the United States. Some economists said the central bank’s new growth forecast was still too optimistic, arguing that an austerity program that freezes public-sector pay and pensions and cuts some social benefits would slow down a recovery even more.

Teodor Todorov, an economist at the Center for Economics and Business Research in London, said the worsening economic situation could soon force the central bank to consider resuming its bond purchasing program, so-called quantitative easing meant to increase the supply of money in circulation.

He said that the central bank would be pushed to act as the government began public spending cuts in earnest, consumer demand remained weak and worries circulated about Britain’s two largest trading partners — the United States and Europe.

“It is likely that pressure will build on the Bank of England to resume its quantitative easing program in order to stimulate a recovery that is quickly losing its legs,” he said.

A deteriorating labor market and a slow economic recovery in the United States prompted the Fed on Tuesday to make a rare promise to hold short-term interest rates near zero through at least the middle of 2013. The step helped to temporarily lift U.S. and Asian stock markets but also showed that the Fed, too, saw little prospect of rapid economic improvement.

Mr. King said Wednesday that he saw no reason for a similar step by the Bank of England because it was “dangerous to make a commitment” on interest rates. It was “not very sensible” because the economic and market circumstances could change very quickly, he said. Emphasizing just how unpredictable global markets and economies were at this moment, he said, “Who knows how the conditions would be next month, let alone in one or two years?”

But the governor hinted that the central bank was unlikely to increase interest rates anytime soon. Mr. King said that there was little the Bank of England could do to bring down inflation, which had reached 4.2 percent in June, because the increase was mainly due to higher oil and commodity prices. He reiterated an earlier forecast that inflation was expected to reach 5 percent in the short term before falling “quite sharply next year.”

The European Central Bank was criticized by some economists last week for raising interest rates too early, in July, in an attempt to stem inflation. The move in part forced the European central bank to later buy Spanish and Italian sovereign debt to prevent the European debt crisis from deepening.

Mr. King emphasized that the challenges facing the British economy, whose export market relies heavily on the countries that share the euro, were “global challenges.”

“The outlook for growth in the world economy has deteriorated,” he said, “and, largely as a consequence, near-term growth prospects at home are somewhat weaker.”

Article source: http://www.nytimes.com/2011/08/11/business/global/dark-clouds-gathering-on-british-economy-central-banker-says.html?partner=rss&emc=rss