|CATEGORY: NEWS AND ANNOUNCEMENTS
Wed 08 Aug 2012
LONDON (SHARECAST) - -Decrease in Bank rate was judged to be potentially negative
-Nothing has changed in Eurozone outlook
-More time needed to gauge effectiveness of Funding for Lending Scheme
In today´s press conference, following the release of the Bank of England´s (BoE) quarterly Inflation report, the Governor –Sir Mervyn King- highlighted the uncertainty which still surrounds the situation in the Eurozone.
To the question of whether he believes that anything substantial has changed in the single currency area his rather straightforward response was that no, he does not believe that the overall outlook has changed at all. The Monetary Policy Committee (MPC), he added, is now looking for action. Furthermore, he indicated that to believe that the crisis is now over is unrealistic.
For him the importance of the above lies in that said uncertainty is the main factor, together with the large rise seen in energy quotes in the recent past- which culminated in the largest squeeze on spending power in a century- for the persistently low economic growth seen in the UK.
As for the possible impact which the the Funding for Lending Scheme (FLS) might have, Sir Mervyn indicated that it is still uncertain although the first indications are positive.
Linked to the above, the Governor emphasised that the main aim of the FLS is to compensate for the recent increase in banks´ funding costs. Those are estimated to have increased by about 100 basis points. Similarly, he called attention to the fact that the Scheme contains incentives for lenders; put bluntly, if banks want cheaper lending then they must lend more.
Of particular interest, at one point he said that more time is needed to gauge the Scheme´s effectiveness, along with that of other measures. To analysts at Digital Look this may perhaps be an indication –together with other remarks- that for now he intends to hold off on further quantitative easing measures. "Certainly, that has been our first impression," they say.
Yet what most seems to have caught the markets´ attention is a reference to the possible adverse effects which decreasing the Bank rate could have on some lenders, for which reason it has not yet been lowered. Some analysts had been banking on a reduction.
In turn, the above is said to have provoked the first significant reaction in Euro/Sterling, which is now falling to 0.7901, down 0.46%.
Outlook for UK GDP growth slashed
The monetary authority has brought down its forecast for Britain´s gross domestic product growth rate, in about two years´ time, to approximately 2% from 2.7% in May.
For 2012 it now sees zero growth, far below the 1.2% previously estimated.
More significantly, the report adds that, “the outlook for UK growth remains unusually uncertain”. What´s the main risk? The lack of sufficiently prompt policy action in the Eurozone to ensure that the adjustments in the level of debt and competitiveness required by some member countries occur in an orderly manner.
Nevertheless, adds the central bank, “a gentle strengthening in the growth of households’ real incomes, together with the combined stimulus from the asset purchase programme and the FLS, should prompt a gradual pickup in economic activity."
The central bank´s outlook for inflation on the other hand remains little changed at about 2% in two years´ time, with balanced risks.