Bank of England releases bleak outlook for the economy

The latest Inflation Report from the Bank of England has suggested that the economy is recovering at a slower rate than expected.

The report, released today, states:

“The recovery continued in the United Kingdom, with output growth across the first half of 2010 close to its historical average. But the level of economic activity remained well below its pre-crisis peak. The revival in the world economy also proceeded, albeit unevenly. The UK recovery is likely to continue, underpinned by the considerable monetary stimulus, further growth in global demand and the past depreciation of sterling. But the risks to growth remain weighted to the downside. Spare capacity is likely to persist over the forecast period, although its extent will depend on the strength of demand and the evolution of supply, both of which are uncertain.”

“CPI inflation remained well above the 2% target, elevated by temporary effects stemming from higher oil prices, the restoration of the standard rate of VAT to 17.5% and the past depreciation of sterling. And the forthcoming increase in the standard rate of VAT to 20% will add to inflation throughout 2011. As these effects wane, downward pressure on wages and prices from the persistent margin of spare capacity is likely to pull inflation below the target. But the pace and extent of that moderation in inflation are impossible to predict precisely. Under the assumptions that Bank Rate moves in line with market rates and the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion, inflation is a little more likely to be below the target than above it during the second half of the forecast period, although those risks are broadly balanced by the end.”

Martin Gahbauer of Nationwide commented:

“The reduction in the MPC’s expectations for economic growth comes as no surprise, as this is the first set of forecasts that takes into account the austerity measures announced in the Emergency Budget. The recent softening in many survey indicators – including this morning’s sharp fall reported in Nationwide’s Consumer Confidence Index – certainly supports the MPC’s more cautious assessment of the UK’s economic prospects. Yet even this more pessimistic forecast projects a relatively robust pace of economic recovery over the next several years, with only a small probability that the economy falls back into recession.

“Despite the upward revisions to the inflation forecast in the near term, the MPC still does not believe that above target inflation will persist over the medium-term. As a result, interest rates are unlikely to rise for the rest of this year at least.”