The Bank of England said today that the recession had probably bottomed out, but warned that any recovery would be hampered by the ongoing reluctance of banks to lend to consumers and businesses.
Releasing a quarterly inflation report likely to cement expectations that interest rates could stay at record lows for a long time, the monetary policy committee forecast that inflation would probably remain below its 2% target for at least two years even if it kept rates at 0.5% and flooded the economy with £125bn of "quantitative easing".
"The economy will eventually heal but the process may be slow," said Bank governor Mervyn King.
"A number of indicators have clearly picked up," he said, adding that the economy would be helped by the big monetary and fiscal stimulus, the sharp drop in the pound's value, which would boost exports, and the process of companies rebuilding stocks that they ran down at the turn of the year.
"All of this will lead to a recovery. But there are solid reasons to believe that spending will take a long time to return to more normal levels. This is not like the typical business cycle of the post-war period," said King. "It is likely that the supply of credit will continue to be restricted for some while, with banks being risk-averse and aiming to raise capital ratios."
The Bank's inflation report sees consumer price inflation (CPI) tumbling to just 0.5% later this year, from the current 2.9%, as the effect of the big oil price falls of the past year feed through.
The gloomy report sent sterling and gilt yields down sharply while the FTSE 100 fell further into negative territory. The pound shed over a cent against the dollar to $1.517 and half a cent against the euro to €1.11. The 10-year benchmark gilt yield fell to 3.47% from 3.65% but two-year yields fell to historic lows of below 1%, something that could feed through into cheaper two-year fixed-rate mortgages.
The Bank said it thought the bottom of the growth fall had now been reached, with a drop of 4.5% from a year ago.
Turning to the Bank's quantitative easing process, King said the MPC added £50bn last week to the £75bn it had planned not because it was disappointed with the effects so far, but because nominal spending in the economy had turned out worse than expected.
"No one can know the effect because it is far too early to judge," he said.
King also said that as and when the recovery became entrenched, the MPC was prepared to raise interest rates and take back its quantitative easing. "The exit strategy is very simple – it's a combination of raising Bank rate and selling some of the assets we have purchased. We're ready to do that whenever we think it is appropriate to do so."
Analysts were surprised by the downbeat nature of the report. "The Bank of England is not buying the 'it's all over' mood that seems to be sweeping over investors and market pundits," said Rob Carnell, economist at ING Financial Markets.
Separate figures from the eurozone showed that the recession there seems to be deepening. Industrial production in the 16 countries fell by a worse-than-expected 2% in March from February, leaving it a record 20% down from a year earlier.
"March's sharp decline in eurozone industrial production confirms that the recession deepened in Q1. Indeed, last quarter's economic contraction is likely to have been even greater than that seen in the US and UK," said Ben May at Capital Economics.
"Given the dismal start to 2009, we expect the eurozone economy to contract by about 5% this year and by a further 0.5% or so in 2010
No comments:
Post a Comment