King warns of storms ahead as forecasts cut

Julian Harris
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THE BANK of England slashed its growth forecasts yesterday, as its governor Sir Mervyn King warned that the UK economy still faces a tempestuous time ahead.

“We are navigating rough waters, and storm clouds continue to roll in from the euro area,” King said, after the Bank’s latest Inflation Report showed that economic growth will be flat in 2012.

The previous report, released in May, predicted around one per cent growth this year. That document also showed growth reaching around 1.8 per cent going into 2013, while yesterday’s report halved that rate to approximately 0.9 per cent.

And King added that the Bank’s forecasts were unable to account for potentially severe knocks that could occur, most likely from the Eurozone crisis. “A black cloud of uncertainty is hanging over investment,” he said, adding that a strengthening pound decreases the competitiveness of British exports.

On top of uncertainty from overseas, deputy governor Charlie Bean said that the Bank is perplexed at seemingly contradictory rise in employment while output is falling – a circumstance that suggests an unprecedented dive in productivity. “We are in a genuine economic puzzle that we don’t really understand,” Bean admitted.

The Bank’s projections also showed inflation nearing two per cent by the end of the year, while May’s report forecast the consumer price index to steady at approximately 2.6 per cent at the same stage.

The Bank of England slashed its near term growth forecasts, and also said that in the medium run growth is set to remain below its trend rate. The UK economy “is slowly healing”, Sir Mervyn King said, adding that sharp risks still remain.

Inflation has stuck above three per cent for 36 of the last 54 months, consistently embarrassing the Bank’s two per cent target. However, the Bank now says “external price pressures” have passed, and that inflation should return to target by the end of the year.