Bank of England Cuts Growth Forecast

By FX Empire Analyst - Barry Norman
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In an announcement greatly anticipated by the markets, the Bank of England today cut its forecast for growth and inflation for the balance of the year.

The Bank of England reported in its quarterly inflation report that the damaging economic effects from the financial crisis could persist longer than previously thought, while inflation is likely to fall below target from mid-2013 and remain there for two years.The central bank revised down its economic growth projections to -0.2% y/y on average during 2012 and reducing its near-term inflation projection to slightly higher than 2% by year end

The report also stated that the biggest risk to any recovery comes from the euro zone—and specifically the danger that leaders will tarry in resolving their long-running fiscal crisis. This has been the sentiment from around the globe, it has echoed from the Chinese Premier to the US President. Recently Timothy Geithner, US Treasury Secretary chided the EU for lack of leadership or guidance. Just last week, ECB President Draghi, pledged to save the monetary union, blaming lack of action on the leaders of the EU for the continuing crisis.

The new forecasts come after BOE board members voted in July to pump an additional £50 billion pounds into the economy through asset purchases with newly created funds, raising the ceiling of its program known as quantitative easing to £375 billion.

The IMF just a few weeks ago, issued a statement saying they commend the Bank of England for its actions, but does not find that the BoE was doing enough to create growth or jobs in the UK.

Last week, economic data released by the UK statistics bureau showed that the UK had slipped back into double dip recession.

Moreover, BoE Gov. King noted that if the Funding for Lending Scheme is successful it could make it less likely that QE would be expanded further. Another important point is that King was asked whether reducing Bank Rate could be counterproductive – since it would hurt the very sector that it is relying on to extend new loans under the Funding for Lending scheme. He concurred and noted that this is why the Bank is not contemplating a cut in Bank Rate in the immediate future. This reinforces trader's views that hope for a rate cut around the turn of the year is misplaced.

After a less‐dovish than expected BoE Inflation Report, the GBP rallied 0.3% but remains within yesterday’s range, trading firmly between 1.5578 and 1.5730, respectively.

In addition, Governor King noted that output has contracted, but the underlying is likely not as weak as the headline data suggests; with lots of erratic or temporary issues impacting the headlines. In addition, he noted that the labor market has proven surprisingly resilient, but productivity growth is unusually low. With regards to the FLS, which incentivizes lending to the real economy, Governor King suggest early indicators are positive

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