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BoE’s King warns against further rate cut

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  • 08/08/2012
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BoE’s King warns against further rate cut
Bank of England (BoE) governor Mervyn King has warned against a further cut in interest rates, arguing it would damage the banking sector and may be "counterproductive".

King’s comments come as the Bank cut its forecast for economic growth this year to almost zero and predicted inflation would be below target in the medium term.

In its quarterly inflation report, released today, the Bank said it expects to see no growth in the economy for 2012, down from the 0.8% predicted in the May report.

Economists suggested the latest predictions opened the door to further stimulus or a possible rate cut.

But, without completely ruling out the possibility of cutting rates in the coming months, King said another quarter point cut was “neither here nor there”.

Giving a press conference today, King described “storm clouds” rolling over the UK from the euro area.

In its report, the Bank said the outlook for UK growth remains “unusually uncertain”, with the greatest threat to economic recovery being an inadequate policy response to the eurozone crisis.

“The MPC sees no meaningful way to quantify the size and likelihood of the most extreme possibilities associated with developments in the euro area.

“But the threat of these more extreme outcomes is likely to continue to weigh on UK economic activity over the forecast period, for example through its effect on asset prices and confidence. This dampening effect is captured in the MPC’s projections.”

The report also said there is uncertainty around the outlook for inflation, but the MPC expects it is more likely to fall below the 2% target than to remain above it during the second half of the year.

In its May report, the Bank had predicted growth of 0.8%, with governor Mervyn King claiming the UK would be “unscathed” by the eurozone “storm”.

After its most recent meeting, the Bank’s Monetary Policy Committee voted to keep interest rates at 0.5% and quantitative easing at £375bn.

The UK economy shrank by 0.7% in the second quarter of the year, a far worse contraction than economists had forecast, extending the longest double-dip recession since the 1950s.

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