Economy may need further QE assistance
More medicine may be needed for the UK's ailing economy after the Bank of England admitted yesterday that the recovery had been slower than expected.
Governor Mervyn King said the economy continued to ‘bump along the bottom’, although he held out hopes for a gradual pick up in output.
In its first forecast since the UK economy staged a disappointingly lacklustre exit from recession, the Bank said recovery would be ‘somewhat less strong’ than outlined three months ago.
Mr King also raised the possibility of further efforts to aid the economy and said it was ‘far too soon’ to rule out an extension to the Bank's £200bn quantitative easing (QE) programme.
The Bank's quarterly inflation report also forecast a near-term inflation spike of around 3.5% before sliding below the 2% target even if interest rates remain at their current historic low of 0.5%.
Northern Bank chief economist Angela McGowan said: “Spare capacity and downward pressure in wages should keep inflation levels below target when these temporary influences on inflation (VAT and energy prices) begin to fade. In this respect, the current inflation hike is not expected to make policy makers deviate from their low interest rate stance any time soon.”
Yesterday’s report also indicated a possible spilt among policymakers.
It said while the likely inflation spike of 3% in January — driven by the return to a 17.5% VAT rate and higher petrol prices — would trigger a letter to the Chancellor, the Bank can do little to alter the near-term outlook.
Although the Bank said inflation prospects remain ‘unusually uncertain’, its forecasts show the consumer prices index slightly undershooting the 2% target in two years' time, even if rates are kept at current lows and there is no unwinding of QE.
Graeme Leach, chief economist at the Institute of Directors, said he agreed that more QE could be needed. “We think that it will and that the risk of a double-dip or even a triple-tumble recession and recovery remains high,” he said.
The UK's longest period of decline ended with growth of just 0.1% in the last three months of 2009, leading to fears of relapse.