Economy stabilising but still faces choppy waters
The UK economy will "zig-zag" in and out of growth this year but is heading in the right direction, Bank of England Governor Sir Mervyn King said yesterday.
In its latest quarterly inflation report, the Bank stuck by previous forecasts for low growth and falling inflation but predicted a less severe risk of recession in the first half of this year.
But Sir Mervyn warned the economy faced "choppy waters", despite industry surveys painting a brighter picture and added there was "no easy remedy" to the consequences of the financial crisis.
The Bank appeared to endorse market assumptions that interest rates will be held at historic lows of 0.5% until 2014, a move which will please homeowners but anger savers.
Some economists warned the report was "too optimistic", while others said the need for emergency measures - such as further quantitative easing (QE) - had faded.
In its central projection, the Bank forecast gross domestic product (GDP) of around 1% this year and 1.8% in 2013, while inflation will hit its 2% target in the final quarter of 2012 and fall to as low as 1.5% the following year.
Sir Mervyn said: "We can take some reassurance from the fact that inflation is now falling. But we are steering a course through choppy waters and many people are experiencing difficult times."
He said growth was likely to recover gradually, although "substantial headwinds" will hamper the recovery and there is likely to be a "zig-zag" pattern of alternating positive and negative growth.
Sir Mervyn said the UK's economy was moving in the right direction because there was a plan to tackle debt.
David Kern, chief economist at the British Chambers of Commerce (BCC), said: "While we agree that growth will gradually strengthen from the middle of 2012 onwards, the pace of improvement is likely to prove slower than the report predicts."
Sir Mervyn pressed the button on a £50bn boost to the Bank's QE programme last week but the report left analysts divided over whether further support would happen.
Alan Clarke, economist at Scotiabank, said the cash injection is "likely to be the last".
But Vicky Redwood, economist at Capital Economics, expects inflation to fall further than the Bank has predicted and the economy will require additional stimulus.