The Bank of England has signalled that UK interest rates would stay on hold for a long time to come, as it cut its growth forecasts for the UK, blaming the weaker global economy.The Bank's governor, Mervyn King, also warned that it could take several years to bring high debt under control in some eurozone countries.
The City is expecting UK borrowing costs to stay on hold until early 2013, and King suggested an early rise was certainly off the agenda.
Speaking at a press conference after the publication of the Bank's latest quarterly forecasts on Wednesday 10th August, King said the greatest risks to Britain's economic recovery came from the eurozone debt crisis, and that these "headwinds are becoming stronger by the day". He said the UK must work to reduce public and private debt mountains.
King said: "The imbalances in the world economy are still not being properly tackled and the burden of debt is still there. This problem will take, I think, a number of years before we will find our way through it."
He added: "Were they to crystallise, the risks emanating from the euro area have the potential to have a significant impact on the UK economy."
The Bank lowered its UK growth estimate for 2011 to 1.5%, from a previous forecast of about 1.8%, and cut its 2012 forecast to around 2% from 2.5%. The Bank expects the growth rate will reach 2% on an annual rate by the fourth quarter of this year – down from 2.5% in its May forecast. In two years' time, annual growth would be 2.7%, a fraction lower than in May.
Vicky Redwood, senior UK economist at Capital Economics, said: "August's UK inflation report echoes Tuesday's message from the US Federal Reserve that interest rates are likely to stay very low for a long time yet."
On Tuesday, the US Federal Reserve took the unusual step of freezing interest rates close to zero for at least two more years, and said it would consider further steps to boost growth. King, meanwhile, gave little indication that the Bank would provide more economic stimulus.
Chris Williamson, Chief Economist at Markit, said: "This is a far less bleak assessment of an economy than that given for the US yesterday by Fed chairman Bernanke. It seems that the downgraded forecast raises the likelihood that the Bank's monetary policy committee will increasingly mull the need for further quantitative easing, but it would require the economic data flow to continue to disappoint in coming months before we might see any real chance of further stimulus."
The Bank is still predicting that inflation will peak about around 5% later this year due to rising utility bills – the same as the May forecast – before falling steadily to 1.8% in two years' time, a degree lower than expected three months ago and below the Bank's 2% inflation target.
King reiterated comments he made in January about household incomes suffering the worst squeeze since the 1920s. "This is a long and deep squeeze in real living standards," he said, adding that the good news was that oil prices had come down in recent days.