The Bank of England on Wednesday cut its forecast for economic growth in Britain because banks were being slow to increase lending and the pace of a recovery in the United States and Europe remains uncertain.
The central bank now forecasts growth to peak at an annual rate of 3 percent, less than the 3.6% it had predicted in May. It also said inflation would remain above the bank’s 2% target until the end of next year, longer than previously predicted, before falling below the target in 2012.
"There are clearly risks," Bank of England governor Mervyn King said Wednesday, hinting that the central bank might consider expanding its stimulus package to support the economy.
"Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated and there is great uncertainty about the outlook for both the U.S. and our most important trading partner, the euro area."
Howard Archer, chief economist for Britain and Europe at IHS Global Insight in London, called the Bank of England’s assessment "pretty dovish." He said it was a hint "that the bank is unlikely to raise interest rates anytime soon and, if it acts at all in the near-term, it is more likely to be to revive quantitative easing."
The U.S. Federal Reserve Tuesday announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities as confidence in the economic recovery had dimmed. The action is intended to keep long-term interest rates down and to stimulate borrowing.
Mr. King said that he was "concerned that credit conditions have not eased as quickly as we had expected" in Britain. The Bank of England held its benchmark interest rate at the record low of 0.5% last week and kept a £200-billion, or $315-billion U.S., stimulus package unchanged.
Lawmakers and business owners in Britain have criticized banks for being reluctant to lend and slowing down an economic recovery. But lenders, including Barclays, rejected the claims last week, saying demand for loans had declined as businesses prefer to repay debt rather than seek new credit. Some analysts also have said banks will be more cautious as long as it is unclear how new banking regulations will affect them.
Mr. King said he expects the economic recovery to remain "choppy" but added that it is "the sort of recovery we’d expect to see given the needed re-balancing" of economies around the world.
After some improvements at the beginning of the year, economic indicators have started to deteriorate again in Britain over the last three months. An index for consumer confidence in Britain fell for a third month in July and dropped to the lowest level since April 2009. House prices declined in July, the first drop for a year, as more people put their homes up for sale, according to the Royal Institution of Chartered Surveyors.
The number of people without jobs declined by 49,000 to 2.46 million in the three months until the end of June but some business groups warned that the numbers are less positive than they appear. The number of part-time workers reached a record high and the number of people who were out of a job for more than a year rose to the highest level since 1997.
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