BoE signals need for emergency stimulus

Bank of England Governor Mervyn King said inflation will probably slow below the bank’s target in 2012 and growth will be weaker than previously forecast, signalling the UK economy may need more emergency stimulus.

Inflation will be about 1.5 per cent in two years, below the 2 per cent goal, the central bank said in its quarterly Inflation Report today. Inflation will undershoot the target even if the bank keeps its benchmark interest rate at the current 0.5 per cent, the forecasts show. Growth may peak at a 3 per cent annual pace instead of the 3.6 per cent rate forecast in May.

“The overall outlook is weaker than that presented in the May inflation report,” King said at a press conference in London. He cited the “persistence of tight credit conditions” and planned budget cuts as risks to growth.

The pound fell after his comments, which came a day after the Federal Reserve reversed plans to exit its own emergency monetary stimulus plan. UK policy makers have split on the outlook for inflation even as the biggest round of budget austerity measures since World War II clouds the prospects for the economy.

The pound slipped as much as 0.5 per cent after the report, and traded at $1.5716 at 12:45 pm in London. The yield on the two-year government bond declined as much as 4 basis points to 0.703 percentage point.

Loosening ‘likely’
“They still look more likely to loosen policy than to tighten,” said Jonathan Loynes, chief European economist at Capital Economics Ltd in London. “The Monetary Policy Committee continues to believe that spare capacity in the economy will pull inflation down sharply in the next couple of years.”

The committee “stood ready to respond in either direction as the balance of risks evolve,” the Bank of England said in a statement. “Inflation is a little more likely to be below the target than above it during the second half of the forecast period”, it added.