UK set for low GDP growth for at least two years, Bank of England warns

Inflation is forecast to remain above the central bank’s 2% target until at least the end of 2015 – peaking at 3.2% later this year. The Bank of England governor insisted a “recovery is in sight” but warned the path for the UK economy will not be smooth…

Powered by article titled “UK set for low GDP growth for at least two years, Bank of England warns” was written by Phillip Inman, economics correspondent, for on Wednesday 13th February 2013 12.38 UTC

Britain will suffer low growth and a squeeze on average incomes for at least another two years, the Bank of England warned on Wednesday, signalling that the economy will remain weak until the next election.

Inflation will remain above the central bank’s 2% target until at least the end of 2015, peaking at 3.2% in the second half of this year, it said. Growth, which is not expected to get above 1% this year, will fail to gain any momentum until 2015 when the economy will regain the size it last achieved in 2007.

The Bank of England governor, Sir Mervyn King, insisted a “recovery is in sight” but warned the path ahead for the UK economy will not be smooth in part because there are limits to what more economic stimulus can achieve.

Nevertheless, he said the central bank remained ready to do more to help the economy if needed.

“We must recognise there are limits to what can be achieved via general monetary stimulus – in any form – on its own,” he said.

Sterling tumbled on the gloomy outlook for the UK and the prospect that the Bank’s monetary policy committee, ignoring recent good news from higher construction output, will inject more funds into the economy. The pound fell to $1.55, down a cent on the previous day.

The governor appeared baffled that ministers had sanctioned large investments in green energy through higher prices and the near trebling of university fees, which raised inflation and made the MPC’s job harder.

King said it was “an own goal” by the government, though he assumed they had taken the impact on inflation into account when they agreed the policies.

His comments came as official figures showed that low wages and high inflation over recent years have badly hit household incomes.

The Office for National Statistics said the real value of average earnings has fallen back to 2003 levels after 30 years of strong growth.

It said new research has revealed average earnings peaked in 2009, but since then wage increases have been outstripped by inflation. Wages are currently running at 1.8% a year, though some areas of the economy remain buoyant.

The ONS said the economy is no larger than it was in 2005 after growth, which began to rise in the latter part of 2009 and the first half of 2010, flatlined.

The Bank of England is under pressure from monetarist economists to bring down inflation by raising interest rates to allow a period of real wages growth. Some economists believe that only with higher consumer demand will the economy regain its previous momentum.

Challenging this view are economists who argue the central bank should inject more money into the economy to improve lending conditions.

The incoming governor, Mark Carney, hinted last week that he may press for the bank to be more aggressive in its attempts to boost growth.

King said the MPC was committed to “looking through” the current high inflation because some of the rise came from one-off factors, such as the near trebling in university tuition fees, and the risk that higher interest rates would crash the economy and push inflation below its target.

“Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term,” he said.

The central bank has spent £375bn on buying government bonds but has held off from increasing the programme. © Guardian News & Media Limited 2010

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