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‘Unappealing’ outlook sustains King’s faith in QE

by Chris Marshall on Nov 14, 2012 at 10:50

‘Unappealing’ outlook sustains King’s faith in QE

The UK faces an 'unappealing combination’ of a subdued economic recovery and above-target inflation, Bank of England governor Mervyn King said today, delivering a markedly downbeat assessment of the economy.

The Bank of England forecast GDP growth of around 1% next year, roughly in line with City forecasts. But ‘the road to recovery will be long and winding’, said King at the press conference after the publication of the Bank’s November Inflation Report, leaving the door open for more economic stimulus.

‘Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter,’ he added.

Commenting after official data showed the UK economy exited its recession in the third quarter of the year, growing a surprisingly strong 1%, King said: ‘It is probably neither as good as the zigs suggest nor as bad as the zags imply.’

Inflation is likely to remain above target for the first part of the Bank's forecast, he added. Today’s report shows that inflation will not fall below the Bank’s 2% target until the third quarter of 2014.

Inflation shot to a five-month high in October as the trebling in university fees and rising food prices forced up the cost of living.

The Bank of England has pumped £375 billion of new money in to the economy in the past three years in an attempt to stimulate growth. But last week the Bank’s Monetary Policy Committee voted against extending its asset purchase programme. ‘The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases,’ King clarified.

Quizzed about the announcement on Friday that the Bank would transfer up to £35 billion of cash from the QE scheme to the Treasury – a move that has provoked controversy – King said it was ‘a lot of fuss about nothing… I don’t think it affects very much.’

The UK’s recession finally ended in the third quarter of 2012, according to the Office for National Statistics (ONS). Since the publication of the stronger than expected 1% GDP growth figure, business surveys have painted a less upbeat picture of the economy. This morning a report from the ONS painted a mixed picture of the labour market, which has so far proved relatively strong. Unemployment fell to 2.51 million in September, taking the jobless rate down to 7.8%.

Inflation, as measured by the consumer prices index (CPI) targeted by the Bank of England, has averaged 3.2% over the past five years. But during the two decades since inflation targeting began inflation has averaged 2.1%

In a speech last month King defended the Bank's inflation targeting. He said that although it was too soon to ditch the 2% target, more leeway is needed to let the inflation rate drift away from 2% in order to take action to avert financial crises.

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