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Bank of England warns no more rate cuts before 2010 as credit crisis deepens
Last updated at 08:22am on 16.05.08
Warning: Mervyn King today
However, inflation is predicted to rise far above previous forecasts and stay well above the Government's target of two per cent for up to two years.
Mervyn King, the Bank governor, said price increases would cause "a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply".
Saying that "the nice decade is behind us", he added that it was "quite possible we may get the odd quarter or two of negative growth".
Presenting the UK quarterly forecasts, the Bank said inflation could reach 3.7 per cent by the end of the year.
According to the Financial Times, inflation projections will not return to the two per cent target until early 2010, suggesting that the Bank has no room for rate cuts until then - even though the UK economy will slow sharply.
Families face a five-pronged assault on their finances, Mr King said in his bleakest assessment yet of the state of the country.
And the governor predicted:
• Gas, electricity and food bills will get even more expensive this year and will push inflation towards 4 per cent, possibly even higher;
• Economic growth is likely to slump towards 1 per cent by the end of the year, and there is now a risk of recession;
• The housing market will continue to fall after worsening 'markedly', but it is impossible to say how far values will tumble;
• Pay rises may be curbed, further damaging employees' quality of life;
• And the banking crisis could continue to run well into 2009, keeping mortgage costs painfully high.
Mr King's verdict cast a pall over Gordon Brown's political fightback by setting out in grim detail the extent of the difficulties facing the country.
The prospect of soaring inflation and slumping growth will also cast doubt on the Prime Minister's belief that he can pilot the economy to safer waters and avoid a recession.
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Battering: Families have been warned to expect a sharp fall in living standards
Mr King cautioned that there was little scope for the Bank to jump start the economy by lowering interest rates because inflation remained a major threat.
Ominously, he said the economy was rebalancing and the Bank should not try to "prevent that adjustment".
The governor described the problems facing the Bank as "its most difficult challenge yet" since it was given independence in 1997.
In recent weeks, he has called on the Bank of England to follow the Federal Reserve in the United States which has aggressively slashed the cost of borrowing in an effort to jumpstart the American economy.
Mr King said: "We are travelling along a bumpy road as the economy rebalances. Monetary policy shouldn't try to prevent that adjustment."
Jonathan Loynes, of City analysts Capital Economics, said: "The message would seem to be that the Bank's rate-setting committee expects to cut rates only once more at the most.
"Its inability or reluctance to cut rates further now increases the chances that the downturn in the economy will be both deep and prolonged."
The Bank yesterday forecast gas and electricity prices will rise by another 15 per cent this year, another devastating blow for those already struggling to pay average bills of more than £1,000.
This will help propel the Consumer Prices Index measure of inflation to around 3.8 per cent by the end of the year, with a real danger it could exceed 4 per cent.
This inflationary surge will have a major impact on families because it is unlikely pay increases will keep pace.
Chancellor Alistair Darling yesterday admitted he was worried about higher food and oil prices.
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Gloomy: The number of people out of work and claiming benefits has risen again
Higher prices will sap the economy's strength because consumers will not have the money to spend in the high street or elsewhere.
Company costs have also picked up sharply, the Bank warned.
"If companies respond by bearing down on wage growth, then real take-home pay would be very subdued over much of the forecast period," the Inflation Report said.
Economic growth will slump close to just 1 per cent at the end of 2008, a far cry from the 3 per cent of 2007 and below Treasury forecasts.
The Bank is not formally forecasting outright recession - officially defined as two consecutive quarters of falling economic output.
But Mr King issued his bluntest ever warning that this is a real risk.
He said: "You can see there is a sharp slowing of growth, and it is quite possible that at some point we might get a quarter or two of negative growth, but recession is not the central projection."
He added: "Clearly further shocks could push us in that direction."
Mr King warned: "There will be a squeeze on living standards over the next couple of years; consumer spending will not grow rapidly.
"It is going to be a difficult period of adjustment for the country. We need to be patient.
"There is no doubt that the squeeze on real incomes that is coming from the rise in energy prices, food prices, import prices, is affecting spending power right across the economy."
Compounding the danger is the continued crisis in financial markets. While banks have improved their finances, the Bank warned the credit crunch was by no means over.
Bradford & Bingley yesterday became the latest lender to ask investors for extra cash saying it needs around £300million.
Royal Bank of Scotland and Halifax Bank of Scotland have already gone cap in hand to shareholders.
Lenders are not only restricting the supply of loans to over-stretched borrowers, but "somewhat less risky borrowers" are also having trouble getting credit, the Bank warned.
The mortgage drought is having a crippling impact on housebuilders. They say customers are disappearing in droves because they cannot get a loan or they lose their nerve.
Despite the Bank of England cutting interest rates, mortgage rates are still soaring. With a typical loan at £158,000, the cost of keeping up with payments is impossible for many families and there has been a sharp rise in homeowners entering the first stage of repossession.
The Bank said the cost of borrowing would be "even higher" if it had not lowered official rates.
Jobless toll 'will hit 2.3m by the end of 2009'
More than 1,200 people a day will lose their jobs over the next 18 months, economists have warned.
Unemployment has been rising for the last three months and yesterday official figures published by the Office for National Statistics showed that it hit 1.6million in March, up 14,000 since January.
Vicky Redwood, UK economist at Capital Economics, said: "The recent rises are likely to be just the tip of the iceberg.
"The risk of a vicious circle of falling house prices and rising unemployment is growing by the day."
She predicted that by the end of next year unemployment would hit 2.3million, the highest level since 1996 when John Major was still in power.
That would mean an extra 700,000 becoming unemployed - equal to 1,211 every day of the week.
Rising unemployment poses the greatest threat to the economy because of the huge ramifications linked to workers losing their job.
The knock-on effects are almost endless, from falling behind with their mortgage to shoppers deserting the high street and thus causing problems for retailers.
Tory work and pensions spokesman Chris Grayling said: "These figures should give everyone cause for concern.
"With all the economic bad news around at the moment and the mounting cost of living, rising unemployment is just going to make a difficult situation worse."
LibDem spokesman Vince Cable said: "With family budgets being squeezed ever tighter it was inevitable that there would be a knock-on impact on employment.
"The Government must face up to reality and take action now to help restore confidence if we are going to avoid a major economic slump."
One of the biggest worries surrounds house-building.
The Home Builders' Federation warned of "widespread redundancies" in the industry, which employs around 300,000. Thousands more work in "connected" industries, from solicitors to mortgage brokers.
With rising unemployment, the number claiming Jobseeker's Allowance is also starting to go up. It jumped 7,200 in April to 806,300, having been falling for 16 months until March.
Reader views (29)
Here's a sample of the latest views published.
I find this site rather interesting - and, I am noticing the same occurrences taking hold within the US. The sad part is "the people do not have a voice"! The PEOPLE do voice their opinions but their statements fall on deaf ears and because of the people not being listened to - we see the world falling into disgrace and destruction before our eye. It will take a higher power to straighten out this world!And, I want to thank this site for informing - "the knowledge is valuable" and I commend you for these efforts.
- Venus, Chicago, USA
It's depressing to hear about unemployment, rising interest rates, inflation and lower consumer spending. I think being unemployed is one of worst things that you have to face in life and as we see our pockets emptied due to paying off bills, food and other essential items, we realize that money is getting harder and harder to get. It is really sad to hear that the UK economy is getting worse and it seems we are heading for hard times but at least we can be content with the fact that we live in a modern world which values freedom and liberty as well as human rights. We are not in the grip of a natural disaster like Burma or parts of China and we a very lucky to be alive even though the economy is bad and the bills are getting harder to pay. I think we people in the Western World are very lucky and we should never look on the bad side, there's always a light at the end of the tunnel is what I believe and the economy will recover, there will be more jobs in the future and things will generally get better. So everyone don't worry and be happy!
- Brian T., Sydney, Australia
Can someone please explain to an obviously dimbo like me this: why because some stupid banks chose to make bad investments overseas do the rest of us here have to suffer. Surely the financial institutions that apparently caused all this should foot the bill: just look at the profits being returned by them.
And am I alone in considering all these so-called economics experts talk a load of claptrap, probably so as to justify their own jobs? Rather like the scientific and other experts who blather on about eggs are good for you, eggs are bad for you; wine is good for you, wine is bad for you, and on and on and on ...
- Annabelle, London
America is headed down the same path. The difference is that there is less gov't influence over the press in the UK. Economic stats are more prone to manipulation in the US and Americans have more faith and trust in their government.
- John Taylor, Miami USA
Ghastly Gordon I hope you're satisfied - you have bankrupted the UK PLC by mortgaging it up to the hilt, then, like a low-life benefit scrounger who's too lazy to go and get a proper job goes to some "cheap loan" company to get a massive loan for some pointless hair brain scheme.
How can you sleep at night knowing that for 11 misery-filled years you and your incompetent Nu-Liebour gophers have ruthlessly taxed and punished decent, hard-working people out of existence with endless stealth taxes and fining regimes - yet you're still bankrupt!
We need to get rid of this crook Ghastly Gordon now!
- Daniel Howard, London, UK
Is there any incentive left for Brits to stay in Britain, any more?
It certainly looks as though those lucky enough to be able to emigrate have the "right" idea!
- Fraser, Telford Park
Same thing is going on here.But not in Ireland. Funny when you cut taxes, reduce the size of government and make your country a great place to set up shop, everyone seems to have money and a job. Get government our of your bedroom and purse and your life will drastically improve. For those who deny this and/or wish to continue to live in the "The Matrix" set up by politicians....stay miserable.
- Harry, Dallas, Tx
The government will probably set up a task force or have a public inquiry into the reasons behind the recession that's due to take place.
That's what they normally do with things.
Then blame the everyone but themselves.
Wouldn't just be nice to once hear a politician talk some sense.
That's why I voted for Boris in the London Mayoral Elections.
- Coster, Barnet
Now is the time for the UK to take a position if it wants to continue with the consumer lead approach and reduce interest rates and taxes to stimulate growth.
- Nigel Solkhon, Brentwood Essex
The global credit crunch is not directly Gordon's fault, but he was tacitly complicit in it, and it IS his and his predecessor's fault that the UK economy is so vulnerable to the global slowdown. But then everybody screws up in the end...
- John, London
Nu Labour came into power with the public sector finances in a very good state - since then our taxes have risen and risen - as has spending - but without any significant reform of the public sector. In addition the legislative burden and red tape has gone up, all the government's forecasts from growth and government borrowing requirements have been wrong.
Now times are hard on a global basis, there is little if any room to manoeuvre. The net result will be is that all our taxes will have to rise to pay for mismanaged government spending.
- Jeremy E, London
Could not agree more with Neil, as there is definitely a "masterplan" for the biggest wealth-theft ever behind all this.
If the banks had lost so much money, some else must have made a packet on the other side.
After Broon stole private pensions, eroding purchasing power of incomes and introducing stealth taxes, property was the only perceived "safe" asset class left.
Multi-billions hedge funds are already piositioned in the background to snap up properties in vast numbers on the cheap.
This is already happening in Central Europe, Germany and France.
Watch this space.
- Weddigen, Munich
Talk about Labour in the seventies, it was the Tories who took us through two recessions in the early eighties and early nineties and the most catastrophic rise in interest rates. And I hardly think the unions are anywhere near as powerful as they were thirty years ago. This crisis is entirely to do with light regulation of financial markets in the US and Europe. The reality is - if we had regulated them harder, the City would have lost business to other financial centres. But because we didn't regulate hard enough, we have a credit crunch as these big institutions default. I doubt any government would have handled the situation differently. Least of all the Tories whose record of financial regulation - see the pension scandals of the early nineties - was hardly exemplary. Go ahead and kick Gordon Brown if it makes you feel better but it's really not all his fault.
- Tony Mcmahon, London, UK
Guess we should put the looming world wide economic slow down/recession down to New Labour too .... Get Real!
- Mic, bromley, kent
Thank goodness I am emigrating to Australia - just in time I think
- Jo Boone, canvey island
As a married man with a family and whose wife looks after our children, clobbered in every way by Labour tax rises (stealth or otherwise) and a real inflation rate of 8% last year (based on what we spend our money on), then we have faced a real cut in living standards for some 18 months plus. I would also estimate that it has stagnated or virtually imperceptibly grown in the two or three years previous to that, mainly due to stealth taxes and anti married family stay at home parenting taxation bias.
So Mr Brown, you may have delivered 10 years of growth to your voters (or perhaps ridden on the global coat tails more likely), but not for me and my family. You have spent our money on things I don't necessarily agree with, and where I do agree, you have spent it wastefully not wisely.
Finally you have the nerve to claim it is now a global problem, there is nothing you can do about it, but hey what a great last 10 years.
No more boom and bust. Dead right matey, just the bust part for married, single earner taxpayers with children, under Labour.
New Labour, tough on the nuclear family, tough on the causes of the nuclear family.
- Andy, South East
How about scrapping the Olympics for a start we could save billions and let’s pull out of the EU, what a saving that would be. The labour government and councils have squandered all our money on idiotic ideas and they have also filled their own pockets, I think now is a time for a real change in politics and policies. I can now honestly say this country is not worth anything to me, if we were invaded tomorrow I doubt whether I would lift a finger to help.
- Stephen D., London England.
Sadly new labour have not only sold off the family silver, but mortgaged and remortgaged UK PLC to the $43billion hilt! Now that their borrow, tax and spend policies have proven to be totally baseless, there is nothing left to pay the rentman -and all the money - as Baldrick would say in Blackadder....'know of it, found it....spent it, so alas we are totally broke'! has long since gone on 'initiatives'. Face it - Gordon Brown has been like the Uncle who squanders away your inheritance on his hobbies, investing ever greater sums in worthless knick knacks! Time to GO!
- Gary, wycombe
Karli: wrong on 3 counts: the world is not getting hotter it's getting cooler (see Hadley Observatory's 300 years' worth of data; food is getting more expensive not because of overpopulation but because of biofuel cultivation, higher consumption of protein in china and India and farm subsidies; and oil and gas will never run out as fresh supplies are being created deep in the earth (the fossil theory of petrochemicals is patchy and incomplete). The banks are engaged in one of their periodic wealth grabs whereby they fuel a boom with cheap credit created out of nothing then foreclose and take your house and car. It happens every 10-15 years and is quite deliberate and carefully calculated.
- Neil, london uk
Do these people not remember the last Labour government in the 70's.
Get ready for the rubbish to be piling up and rats running free in the streets of London. Raging inflation and crippling taxes. Unions holding the country to ransom. Again.
Thankfully we are rid of red Ken. That has only just taken the edge off of what we are all about to go through
- Jimbob, Kensington
About time and now I may be able to move back to the UK to buy a house
for myself and my family.
- Beth Dwyer, London UK
I think the last 10 years of "economic growth" and consumer confidence as Gordon calls it have been underpinned by easy credit and rising house prices. The economic base has therefore been made of sand as credit dries up and house prices drop as they are hugely overvalued. We have been encouraged to live beyond our means to make big profits for others, and now reality is knocking at the door.
- Steve, Hereford
And families get at least some concessions, what about 'singles' and 'singles retired' without children ....?
- Helen, Norwich
But still Crash Gordon says he has all under control?! More taxes anyone?
- Jacqueline, Hampstead, London
Declining living standards... Is the result for Britain after "Eleven Consecutive Years of New Labour"!
- Fraser, Telford Park
Tell us something we do not already know Mervyn; and perhaps Mr Speaker Martin can tell us how he manages to sleep easily whilst we suffer and his wife swans around in taxis at our expense.
- James Elliott, Eastbourne UK
The globe's hotting up, food prices are being pushed up by a variety of factors - not least of them, overpopulation - and the oil and gas are running out... so the proposition that living standards will decline is a no-brainer, surely?
- Karli, Tottenham London
Inflation would be even higher if it was a true measure of high street prices, and didn't include "everyday" items such as plasma tellies and DVD players, which only MPs can afford to buy.
- Nobby Clark, Perth, Scotland
Gordon, you have to go NOW. Your 11 years of economic policies are now coming home to roost. A massive economic downturn at the same time as massive inflation -- and no government levers left to pull to influence the coming meltdown!
Gordon, you've accomplished your lifelong ambition of turning this once glorious country into an E.U. province, with one of the worst economies (if not the worst) in the world. Now it's time to depart and let a more competent person take over!
- Phil Jones, London UK
