Governor pessimistic on recovery

By Michael Millar

Date: Tuesday 26 Jun 2012

Analysts said they were confident that more quantitative easing (QE) was on the way in July after Bank of England policy makers gave downbeat evidence to MPs this morning.

Governor Mervyn King told the Treasury Select Committee that the outlook for the UK economy had worsened recently, driven by the crisis gripping the eurozone.

"In the last six weeks...I am very struck by how much has changed since we produced our May Inflation Report," King told the Committee.

"I am particularly concerned because for over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," he said.

King added that he thought the UK "was not halfway through" its financial problems, saying it was "a deep crisis with enormous challenges".

He confirmed the Bank would be prepared to cut the interest rate further if "that turns out to be necessary".

"What is making our task extremely difficult is that we find it very hard to judge what will be the pressure on inflation two or three years down the road," he said.

"There is just enormous uncertainty out there, I have no idea what is going to happen in the euro area."

However, fellow Monetary Policy Committee member David Miles said that because of the effects on lenders' margins he was unsure whether a cut would be a positive step.

Dr Howard Archer, Chief UK Economist at IHS, said the comments would fan belief that the Bank of England is likely to pull the QE lever again in July.

He said he expected a £50bn increase to take the stock up of assets purchased under the scheme up to £375bn.

At their June meeting policy makers voted 5-4 against more QE, with the Governor in favour of boosting the programme by £50bn.

The Bank of England hopes the recently announced "funding for lending" scheme could provide a powerful boost to the flow of credit.

Under the plan banks will receive credit but only if they promise to lend it on, something the Governor told MPs would provide a "significant financial incentive" to banks to expand lending to households and businesses.

He said the details would be finalised shortly, but that the scheme would have to be run past the European Commission to ensure there were no issues relating to the provision of state aid.

Spencer Dale, another of the Bank's policy makers who was up in front of the MPs, said said he hoped that stronger lending would not only increase aggregate demand but would also improve the economy's supply capacity by encouraging investment.

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