The Bank lowered GDP forecasts for 2012 from 1.2% to 0.8%, with growth then rising to around 2.7% in two years’ time. CPI inflation is expected to trend towards the 2% target later this year, but may not hit that level until 2013, the Bank’s forecasts suggested.
GDP growth this year is expected to be impacted by a number of factors, including the extended public holiday in June.
Bank of England governor Mervyn King said the forthcoming extra Bank Holiday for the Queen’s Jubilee would knock around 0.5 percentage points off Q2 GDP, but suggested the effect of the London Olympics would more than offset the fall in Q3.
King added the Bank is assessing the prospect of further quantitative easing on a month by month basis, but dismissed suggestions that the asset purchasing programme was now less effective than in the past.
“I don’t think we have any serious concerns there are diminishing returns [from QE]. The circumstances in which you carry out asset purchases can affect its impact but I do not believe in diminishing returns in and of itself,” he said.
King also said the Bank, the Financial Services Authority and the government had been preparing contingency plans for a break-up of the euro for some time, saying the single currency area is “tearing itself apart with no obvious solution”.
He said the European Central Bank had acted “heroically” but urged it to go further to stave off more serious developments.
“Kicking the can down the road is not the answer […] whatever happens, there are difficulties ahead. We are navigating through turbulent waters with the threat of a storm coming towards us,” King said.
