Bank of England sees stagnant UK economy

AP News
Posted: Aug 08, 2012 6:50 AM

LONDON (AP) — Britain's economy will stagnate this year, the Bank of England has forecast, raising expectations that more stimulus measures will be needed.

In its quarterly Inflation Report released Wednesday, the Bank predicted that the U.K. economy will not grow overall in 2012 in spite of staging a return to growth in the second half of the year, ending a recession that began in the last quarter of 2011.

Three months ago, the Bank had forecast growth of 0.8 percent for the year. Those hopes evaporated as the U.K.'s economic output fell by 0.3 percent in the first quarter and 0.7 percent in the second quarter.

"Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing," said Mervyn King, the Bank's governor.

The downbeat forecast supported expectations that the Bank may extend its program of asset purchases, or quantitative easing, beyond the current limit of 375 billion pounds once the latest tranche of purchases is completed in November.

"The door is clearly open to more stimulus," said Vicky Redwood, chief U.K. economist at Capital Economics.

King said a new "funding for lending" program had led to some banks cutting loan rates, but he confirmed that banks could use funding from the program to bolster their balance sheets or profits rather than supporting investment in the economy.

Consumer price inflation, currently 2.4 percent, may drop near the government's official target of 2 percent by the end of the year and fall below target next year, the report said.