Bank of England offers hope

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BankofEngland A man sits on a bus as it passes the Bank of England in the financial district of the City of London.

London - Britain's central bank lifted a bit of the gloom hanging over the economy on Wednesday, issuing a slightly improved outlook for inflation and growth for the first time since the financial crisis.

Bank of England Governor Mervyn King, presiding over his final Quarterly Inflation Report before he hands the reins to Mark Carney, said the better forecasts did not mean the recovery was secure.

“Today's projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago. That's the first time I've been able to say that since before the financial crisis,” King told reporters.

“But this is no time to be complacent. We must press on to ensure a recovery and to bring down unemployment.”

Annual inflation, currently running at 2.8 percent, is likely to fall back to around the bank's 2.0 percent target in two years' time. That was lower than a forecast of 2.3 percent the Bank of England issued in February.

But the bank also noted that monetary policy remained “highly stimulatory” and gave no indication that more help was on its way, even though King has recently led a minority of policymakers in favour of more government bond purchases.

Sterling rose 0.3 percent against the dollar to hit $1.5272 after the forecasts but was later was flat on the day. British government bond prices extended their losses.

A strengthening of sterling and a drop in oil prices have helped ease price pressures in recent weeks.

The bank said the economy was “likely to see a modest and sustained recovery over the next three years”. That represented a small upgrade from its assessment in February, when the bank said the recovery was likely to be “slow but sustained”.

In February, the central bank unsettled some in financial markets by predicting that inflation would not return to target until the first quarter of 2016.

Britain has been suffering its slowest economic recovery in decades, and the BoE forecast that GDP was more likely to remain below its pre-crisis level for another year or so.

Unemployment data on Wednesday underscored how weak Britain's economy remains, with a broad international measure of joblessness rising and earnings excluding bonuses growing at their slowest pace since records began in 2001.

Even so, Britain is faring better than the euro zone, which is now in its longest ever recession.

King has presented the BoE's inflation report for more than 20 years. After he was given a farewell round of applause by reporters, he said he would miss the quarterly news conferences.

“There are some things about this job that I certainly won't miss, but one thing I will miss is the regular inflation report press conferences, probably the one event I look forward to.”

CHANGES AHEAD?

Britain's economy grew by a sluggish 0.3 percent in the first three months of 2013 from the previous quarter.

In recent months the BoE has cooled on its main tool used to help Britain recover from the financial crisis - the purchase of 375 billion pounds ($575 billion) of government bonds - and instead has revamped measures to stimulate bank lending.

Nomura economist Philip Rush said that this impression carried on in May's inflation report and news conference.

“QE was notable for its absence. That tells us a lot about how the policy debate has moved,” he said.

The bank sets monetary policy with the aim of ensuring inflation returns to its 2 percent target within two to three years. Finance minister George Osborne has encouraged it to take a more flexible approach when its next governor takes over.

Carney, who remains governor of the Bank of Canada until June 1 before he moves to London, is a fan of giving long-term guidance on interest rates as a way to stimulate the economy.

King sought to quash speculation that the bank under Carney might buy riskier assets, such as mortgage-backed securities or corporate debt, as another way to get growth going again.

“We'll buy stuff which is guaranteed by the government. We are not in the business of putting taxpayers' money at risk,” he said.

Gilt prices fell more when he said the radical option of imposing negative interest rates for banks parking cash at the central bank - a way to get them to lend more instead - remained on the table. But King also said there were good reasons not to resort to that option in Britain. - Reuters


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