The Bank of England’s inflation report for August 2011 points to a slowdown in the economic recovery, as growth remains slow and inflation high, with low interest rates seeming to have little effect on this.
The Bank has now downgraded its forecasts for growth and confessed that inflation is likely to run as high as 5 per cent this year. Growth predictions have been adjusted from 1.8 to 1.5 per cent for the rest of this year, and from 2.5 down to 2 per cent in 2012. “The recessionary hit to the economy’s capacity to produce may be more substantial and long lasting than might have been hoped”, stated Bank of England Deputy Governor Charlie Bean.
This is the fifth time that the Bank of England has been forced to downgrade its expectation since George Osborne took over as chancellor and is leading many to question the integrity of the government’s current plans.
Speaking at the inflation report’s publication press conference, Sir Mervyn King, Governor of the Bank of England was quick to point out that the main causes of this stagnation came from overseas, citing in particular the eurozone debt crisis; “Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy”.
There is seemingly little that the Bank of England can do in the face of sovereign debt crises in Europe, short of pulling the sails in and riding out the storm as best we can. Sir King has warned that it may take years for some countries to resolve their high debt issues and that interest rates and borrowing costs this side of the channel were likely to stay on hold until at least the beginning of 2013.
Banks estimate that British businesses are sitting on £60 billion in funds they are too nervous to invest in the current climate, given that 50 per cent of the country’s exports go to the eurozone it is not hard to see why. Debt crises overseas could hit the UK’s economy in a number of different ways, without the right action being by Sir Mervyn King and others at the top of the banking industry, further recession is a looming possibility..