Bank of England expects slow economic recovery

[February 10, 2010]  LONDON (AP) -- The Bank of England said Wednesday that the pace of recovery in the U.K. economy is slower than it previously forecast, impeded by tight credit and the need to repair public and private balance sheets.

"The strength of the recovery is highly uncertain," the bank said in its quarterly Inflation Report.

It said it expected inflation to peak at 3.5 percent before easing back toward the official target of 2 percent. Consumer price inflation shot up a full point in December to 2.9 percent, the biggest monthly rise on record.

"The pickup in inflation largely reflects the impact of one-off adjustments to the level of prices which should have only a temporary effect on inflation," the report said.

"Downward pressure from the persistent margin of spare capacity is likely to cause inflation to fall back to below the target for a period as these temporary effects wane."

The forecast assumes that the bank will not expand its program of asset purchases beyond the 200 billion pounds ($320 billion) already spent to stimulate the economy. The program, known as quantitative easing, inflates the money supply.

That expenditure, plus the fall in the value of sterling, "should underpin a recovery in economic activity," the report said.

It added that it was difficult to assess with precision the impact of the unprecedented loosening in monetary policy when other significant and unusual forces are affecting the economy.

"And the extent to which net trade increases will depend on the vigor of the global recovery and on the ability of U.K. companies to benefit from sterling's depreciation by switching resources toward the production of tradable goods and services."

The report said it would be a considerable time before banks resume normal lending, and uncertainty about how much further household spending would tighten, clouded the prospects for recovery.

Jonathan Loynes, economist at Capital Economics, said the report "looks distinctly dovish and will raise questions over why the (bank's Monetary Policy Committee) did not extend its quantitative easing program further last week."

"The clear message is that further policy support may yet be needed, whether that is more QE ... or other forms of support," Loynes said.

The bleak assessment came despite some cautiously upbeat data on industrial production -- official figures on Wednesday showed a 0.4 percent rise in the fourth quarter, suggesting the year-end emergence from recession may have been somewhat stronger than initially estimated.

Loynes said the latest data suggested that fourth-quarter GDP may be revised upward from the preliminary figure of 0.1 percent growth. That weak figure marked the official end of a deep recession which had dragged on for six quarters.

Still, he agreed that growth would be only gradual, considering the weaknesses in the wider economy.

[Associated Press]

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