Bank of England Cuts Growth Forecast in Quarterly Inflation Report
The Bank of England slashed its growth forecast for the United Kingdom and hinted at further easing policies Wednesday in the Quarterly Inflation Report . The Bank cuts its GDP forecast and kept a prior inflation forecast on hold as the U.K. slips deeper into recession. In its forecast, the Bank included a rate cut in the second quarter of 2013 and a constant size of its QE program at 375 billion pounds.
The Bank highlighted that weak domestic and Eurozone demand, in addition to increased fiscal consolidation, are continuing to drag on U.K. growth. Moreover, the Bank highlighted that it sees a risk of increased currency strength curbing growth, as euro depreciation seen since the recent flare up of the European Debt Crisis has caused the pound to strengthen, further restraining exports.
In a press conference following release of the report, Bank of England Governor Mervyn King noted that the recent rise in bank funding costs is worrisome. Even with the Bank offering a new round of cheap financing for banks to spur credit growth, funding costs in private markets have continued to creep higher. These funding cost increases have occurred as markets speculate that domestic recession and spill-over from the European Debt Crisis are hurting U.K. banks.
England has become the latest country to fall victim to Europe's woes. China has reported falling export and total trade figures over the last few months as Europeans have demanded less goods from China. U.S. growth has slowed over the last few quarters, and many economists have said Europe is largely responsible.
The Bank of England indicated that inflation seems to be falling and should remain low for some time. This could lead the Bank to increase the size of its QE program and cut rates. Both of these actions would likely be negative for the pound and rate cuts could hurt U.K. banks' net interest margins.
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