Monday 18 February 2008

UK economic outlook looking bleak

Mervyn King the governor of the Bank of England, warned last week that Britons must face up to a genuine reduction in standard of living, as he predicted the economy was likely to come to a halt in the coming months.

The Bank of England governor’s comments came as he presented the most pessimistic forecast for UK growth and inflation since the Bank gained independence more than 10 years ago, dashing market expectations of aggressive interest rate cuts.

There was a reasonable chance the economy would contract in coming months, he highlighted, that inflation would rise so steeply it was ‘more likely than not’ that he would have to write to Alistair Darling, the chancellor, explaining why inflation had risen so far above its 2 per cent target.

The Bank’s bleak immediate outlook will represent a mild form of stagflation if it materialises, putting more pressure on Mr Darling after his recent policy reversal on taxation.

The detailed outlook on inflation showed that it would remain well above the Bank’s target in medium term if interest rates were cut three or four times, as investors expect, but was likely to fall below target if rates were held at 5.25 per cent.

Since it started inflation reports in 1992, the Bank has not held out such a gloomy prospect for the immediate future, and although Mr King expected unemployment to rise and “very weak consumer spending in 2008”, he insisted the Bank’s central forecast was far from a prediction of a severe recession.

The big question was how a slowdown would hurt banks balance sheets and force them to tighten credit conditions. That was unknown and he urged banks to recapitalise and dilute the holdings of shareholders instead of withholding lending.

Mr King made it clear he opposed any suggestion or mortgage lenders having access to government-supported financing. “This is a route we ought to be extraordinarily cautious on before we explore,” he said.

Compare the true cost of over 100 Share Dealing Accounts including the cost per trade and broker's admin charges.