UK outlook is uncertain says Bank of England

4 min Read Published: 12 Nov 2010
image by By den99 - flickr

The UK economic outlook is still uncertain, the governor of the Bank of England, Mervyn King, warned during this week's Quarterly Inflation Report.

Each quarter Mervyn King sets out the Bank's economic analysis and inflation prospects for the UK in a Quarterly Inflation Report. The reason that this is report is worth noting is that the the Bank's Monetary Policy Committee (MPC) bases its interest rate decisions on the details therein. So it can give a steer as to what may happen to future interest rates and ultimately your monthly mortgage repayments.

Economic outlook

When delivering the report Mervyn King said that he believed the economic recovery would continue although there was some uncertainty as to how the government’s cutbacks will impact on the construction industry, one of the key drivers in the recovery to date. However, he thought an economic slowdown was unlikely.

Another potential headwind for the recovery is bad news from the global ecomony and in particular Europe. The increasing lack of cooperation on the international stage could damage the UK's growth prospects as nation's look after their own interest at the expense of other's (called protectionism).

Inflation

On inflation Mervyn King said that ''given the quantitative importance of the different influences buffeting the economy at present, it is hard to judge how inflation will evolve in the medium term and there are sizeable risks in both directions."

He estimates the based on interest rates reaming where they are and no further quantitative easing (QE) the chances of inflation being above or below the Bank of England’s target of 2percent by 2013 is roughly the same.

However, he then said that the most likely outcome is that inflation falls below target by 2013. While that contradicts the mathematics in the previous statement, analysts were quick to claim that this was a hint that the UK could follow the US and announce a second wave of QE in the future..

MPC division

On a different note, over the past months the MPC have been split over what to do with interest rates or whether to restart QE. However, Mervyn King used the platform to emphasise that this was proof that the MPC was operating as it should be despite the division.

As an avid cricket fan, he then launched into a cricketing analogy:

"Like the English batsmen preparing to defend the Ashes, watching carefully, perfectly balanced in the crease, ready to play forward or back according to the length of the incoming delivery... the MPC will watch the incoming data carefully, ready to adjust policy in either direction in order to keep inflation on track to meet the 2% target in the medium term."

So what does it all mean?

While there is no clear indication of the MPC's future plans there is no suggestion that interest rates will be rising any time soon given that Mervyn expects inflation to drop back to 2% regardless. As for QE, watch this space.

The Bank of England are trying to give a sense of 'everything is under control and we know what we're doing'. But I seem to recall Mervyn once claiming that inflation would come under control at the end of next year. But in August he decided that in actual fact inflation would be back to 2% in 2012. Now this week he's chosen 2013.

This reminds me of another sporting analogy – its called 'moving the goal posts'.

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