Bank warning on growth

Growth forecast reduced & rising unemployment continues.  Interest rates to stay low for years and employment prospects improved.

David Smith, Economics Editor

THE Bank of England will this week downgrade its growth forecast for the year, pushing it even further below chancellor Alistair Darling’s prediction of a 3.5% contraction, and predict that inflation will remain low for the next two to three years.

The Bank, which surprised the markets on Thursday by announcing a £50 billion expansion of its quantitative easing programme, will repeat its view that the economy is close to bottoming out. It will also warn of a subdued recovery, constrained by the continued weakness of bank lending.

Its downward revision to growth will mainly result from the fact that gross domestic product in the second quarter was weaker than it expected in its May forecast.

The implications of the forecast will be that Bank rate should stay at 0.5% until well into next year. Officials have said that when it comes to tightening policy, rates are likely to be raised before assets purchased under quantitative easing are sold back into the markets. However, with a fiscal squeeze looming, there will be pressure for monetary policy to remain loose for some time.

The Bank’s downbeat tone on growth will be reinforced by official unemployment figures due on Wednesday. They are expected to show the claimant count rose by about 25,000 last month and that the Labour Force Survey jobless measure increased by about 250,000 over the latest three months.

A survey of employers by the Chartered Institute of Personnel and Development this week is expected to reveal an improvement in employment prospects, particularly among private-sector employers. It is, however, also likely to show that public-sector employers are becoming gloomier and that there could be a second wave of redundancies in the winter if the recovery is weak. (David Smith, The Sunday Times) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6788635.ece

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