Economy to stage 'fragile' recovery next year, says BoE

Published on Wednesday 12 August 2009 21:28

BRITAIN'S economy will stage a "fragile" recovery next year, central bank policymakers yesterday forecast, pushing shares higher on hopes that the worst of the downturn has passed.

In its quarterly inflation report, the Bank of England predicted Britain's worst recession since the Second World War would end early next year. But it warned it would take time for GDP to return to pre-crisis levels, pushing unemployment up from the current 13-year high.

Interest rates are likely to remain at a historic low of 0.5 per cent throughout 2010, analysts forecast, as the BoE signalled that monetary policy was unlikely to be tightened in the near future.

It admitted the scale of the recession was worse than it had expected just three months ago, although the pace of contraction had slowed and stronger results from business surveys suggested the trough in output was near.

The BoE said its 175 billion quantitative easing scheme – effectively printing money to buy assets – would help a slow upturn but warned that "the timing and strength of that recovery remains highly uncertain".

Rate-setters expect the economy to shrink by about 5.5 per cent at the lowest point this year before beginning its recovery.

Mervyn King, governor of the BoE, said: "The sustainability and strength of any recovery will be affected by necessary balance sheet adjustments of the banking, household and public sectors. Recovery could be slow and protracted."

City economists said yesterday the report suggested financial markets had been pricing in interest rate rises too early.

Vicky Redwood, an economist at Capital Economics, said: "The report gives a clear signal policy is unlikely to be tightened any time soon and does not rule out a further extension of quantitative easing."

The inflation report showed that if interest rates rose with market expectations – to nearly 4 per cent by end-2011 – inflation would be just 1.5 per cent in two years' time.

Sterling dipped against the dollar and gilt futures surged yesterday as investors bet UK rates would stay at the current level for longer than expected.