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
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.
(c) 2012 Benzinga.com. Benzinga does not provide investment advice.
All rights reserved.