Bank of England more worried about recession than in downturn

Tables published today show that the Bank believes there is at least a one-in-10 chance the UK will suffer a double dip over the next 18 months.

Its current forecast is more bleak than any projection since February last year, as Britain was coming out of the deepest slump since the 1930s, and even worse than its outlook in May 2008, when the recession had just started.

Details of the Bank's forecast came as it emerged that the two remaining members of the Bank's nine-strong rate-setting committee voting for a rise abandoned their position.

Spencer Dale, the Bank's chief economist, and Martin Weale, an external member of the Monetary Policy Committee (MPC), dropped their vote for a quarter-point rise this month and joined the majority view for rates to remain at 0.5pc, minutes of the MPC meeting showed.

It was the first time the committee had been unanimous since May 2010. Just three months ago, three members were voting for an increase, including a half-point hike from Andrew Sentance, who has now left the MPC.

The committee also discussed further stimulus to help the recovery. Adam Posen, another external member, again voted to add £50bn to the £200bn of quantitative easing (QE), but the minutes noted that other "members considered whether there was a case for increasing the degree of monetary stimulus".

For the time being, "those members concluded that the case was not yet strong enough".

"Further asset purchases might nonetheless become warranted were some of the downside risks to materialise," the minutes said.

The sharp shift in sentiment, reflected in the downgrade to the Bank's central forecast for growth this year from 1.8pc to 1.5pc, reinforced expectations that interest rates will remain at a record low for at least another year.

James Knightley, economist at ING Financial Markets, said: "Today's figures add weight to the view that a hike in rates remains a distant prospect – at least 12 months in our view – while an expansion of QE remains a clear possibility."

The markets are currently not expecting a rate rise until the middle of 2013.

According to the Bank's "numerical parameters", the chances of the economy contracting this quarter are one-in-eight and are at least one-in-10 for every quarter until March 2013, with the exception of the final three months of this year.

Comparing the latest forecast with that from May 2008, Simon Ward, chief economist at Henderson, said: "They are more worried about recession now than they were when we were actually starting one last time."

He added that the "probability of a double dip is greater than these forecasts as the Bank calculates growth on a year-on-year basis".

"It is quite difficult for that to turn negative," Mr Ward said. "The normal definition of a recession is two consecutive quarters of quarter-on-quarter contraction."

The minutes showed the Bank has now "judged it increasingly likely that the global slowdown would prove to be more prolonged than previously assumed". The biggest risks are international, and a eurozone crisis "could have a material adverse impact on the UK".

The Bank warned the slowdown had knocked both exports and business confidence, which "could dampen investment" and slow the recovery. It added credit conditions are not improving for small businesses. "Small companies, with weak cash flow or relatively little collateral, still found borrowing terms prohibitive," it said.

The Telegraph

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