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Tags: UK | Central | Bank | Outlook

Pessimistic UK Central Bank Sees Outlook Worsening

Tuesday, 26 June 2012 12:24 PM EDT

The outlook for Britain's economy has worsened over the past few weeks due to turmoil in the eurozone and signs of deterioration in emerging markets, the Bank of England said on Tuesday.

The world was not half-way through a deep crisis and the eurozone turmoil was creating enormous uncertainty, leaving Britain was at risk of a downward spiral if businesses postponed investment, Governor Mervyn King told a parliamentary committee.

Britain's economy slipped into its second recession since the start of the financial crisis around the turn of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the eurozone crisis.

The government and the central bank announced two schemes on June 14 get credit flowing through the economy, as a huge budget deficit limits finance minister George Osborne's room to raise spending to boost growth.

"We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with," King told parliament's Treasury Committee.

"In the last six weeks...I am very struck by how much has changed since we produced our May Inflation Report," King said.

"I am pessimistic (about the eurozone outlook).I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road," he said.

The central bank's Monetary Policy Committee voted 5-4 against buying more government bonds with newly created money to boost the economy, but most economists expect another round of quantitative easing in July.

Policymakers Ben Broadbent and Spencer Dale - who both voted against more stimulus in June - as well as David Miles all identified the eurozone debt crisis as the main threat to Britain's economy in their annual reports to parliament.

Chief economist Dale said he thought that easing credit costs may be a better option to help the economy.

Broadbent also said he would take the new schemes into account when deciding about his vote next month.

Global Worries

Several policymakers have voiced doubts about the effectiveness of more asset purchases, saying banks' reluctance to provide cheap credit and companies' lack of confidence to take on more debt were more of an obstacle to growth.

But central bank governor Mervyn King - who voted in favor of increasing the asset purchases by another 50 billion pounds to 375 billion pounds - remained adamant that cash injections could still stimulate the economy.

"What has particularly concerned me in the last several months - why I have voted for more easing policy - was my concern about the worsening I see in the position in Asia and other emerging markets," King said.

"And my colleagues in the United States are more concerned than they were at the beginning of the year about what is happening to the American economy," he added.

Britain has not recovered from the 2008/2009 slump that has left many Britons worse off, and fears are rising that another prolonged recession would do lasting damage to the economy.

The pressure on the government to increase spending directly have been growing, but an unexpected increase in borrowing in May highlighted the constraints for the government, which has pledged to erase the budget deficit still at around 8 percent of GDP.

The new funding for lending scheme - designed to lower banks' funding costs in return for more lending to companies and households by allowing them to swap illiquid assets for more liquid ones - should be up and running within weeks, King said.

© 2022 Thomson/Reuters. All rights reserved.

Tuesday, 26 June 2012 12:24 PM
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