Holding up the performance of Team GB at the London 2012 Olympics as the example to follow, the governor of the Bank of England paints a gloomy picture for the immediate future of the people of the UK.

'Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness,' he said as he zeroed growth forecasts blaming ‘erratic factors’ such as June’s Diamond Jubilee bank holiday as well as the ongoing crisis in the Eurozone. ‘It is to our Olympic team that we should look for inspiration.’ He went on. Looks like we’d better get ready for the long haul then.

Unsurprisingly the Eurozone was deemed an area of particular concern with the report overview stating “The greatest threat to the recovery stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area to ensure that the adjustments in the level of debt and competitiveness required by some member countries occur in an orderly manner”.

The now near zero growth forecast for the rest of 2012 is down on the marginal 0.8% growth that the BoE previously set out and it has also cut medium term growth forecasts from 2.6% to 2%.

On the plus side the BoE said that inflation was under control, had fallen back to 2.4% in June (CPI) and that it was more likely to go on and actually undershoot the 2% target.

Some also say that the statement carries a hint that more QE may well be on the way.

Nida Ali, economic advisor to the Ernst & Young ITEM Club, said:

The downward revisions to both growth and inflation were broadly in line with expectations and largely reflect recent events rather than a change of view. Monthly economic indicators, in particular business surveys have been relatively soft over the past couple of months and the official data has continued to disappoint.

For once the Bank had been too cautious in May about the pace at which inflation would fall. Most of the temporary factors that had kept inflation elevated over the past couple of years have now unwound, but spare capacity in the economy is likely to continue to exert downward pressure on price. The Bank's forecast for inflation slightly undershooting the 2% target in the medium-term seems sensible.

Over the past couple of months, the Bank has taken a number of initiatives to loosen monetary policy, such as raising the level of asset purchases, introducing the Funding for Lending Scheme and activating the Extended Term Repo Facility. MPC members are now in ‘wait-and-see mode’ to judge how they feed into economy and there was no indication of any further monetary stimulus in the near future. Assuming that the Governor’s comments were representative of the majority on the Committee, they also appeared to head off any chance of a rate cut.

According to the Bank's central forecast, inflation is already expected to remain slightly below the 2% target for a prolonged period. This could worsen further if downside risks to the outlook were to materialise, particularly from the Eurozone. Were such a scenario to play out, it would force the Bank to provide further monetary support.”

Nawaz Ali, UK Market Analyst for Western Union Business Solutions said:

Governor Mervyn King may have restored some of the pound’s credibility in currency markets today by playing down expectations that the Bank of England is preparing an interest rate cut to help revive the troubled British economy.

The bank’s chief warned markets that an interest rate cut could prove counterproductive whilst expecting the bank’s quantitative easing exploits to have little negative impact on the value of sterling putting the British currency under a much brighter light than it has been over the past few weeks.

King still gave investors plenty of reasons to panic, detailing economic growth projections from the central bank’s quarterly inflation report which were pretty discouraging. Policymakers now expect the UK economy to barely register any growth in 2012 while longer-term growth estimates were also cut by some margin.

Initial reaction to the report was always going to be negative; however, King’s comments about current policy measures sounded somewhat confident which should force a number of investors to question their predictions of more panic-driven monetary action from the BoE.”

Andrew Smith, KPMG Chief Economist said:

More bad news: another forecast, another downgrade. The Bank has just slashed this year’s projection of 1% growth – made only three months ago – to nothing. Even that could prove optimistic: output will have to pick up sharply from now on if 2012 is not to be another recession year.

Economic data will have been distorted by the Jubilee holiday and the Olympics, but there seems little on the horizon to lift the economy. Austerity measures have a long way to go at home and Europe, our main export market, is stagnating at best.

Bank of England

Bank of England-FreeFoto.com

The good news, to the extent there is any, is that inflation is falling rapidly. Real incomes should soon start to increase, providing some relief to households. But whether consumers will spend or continue to save remains to be seen.

With inflation now projected to fall below target as early as the turn of the year, the door is wide open for more unconventional policy measures. Further quantitative easing is likely once the current tranche is completed in November. But with the MPC now having fully reversed its earlier optimism (a year ago it was forecasting 2% growth this year) even the previously dismissed measure of a reduction in interest rates is back on the table.”

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