Bank of England heads back Budget forecasts

Hugo Duncan
21 Apr 2009

Bank of England economist Andrew Sentance today said that the UK economy is on track to recover before the end of the year and to rebound strongly in 2010.

Sentance, a member of the monetary policy committee, suggested the outlook published by the Bank in February will be repeated in the next report in May.

Such a move will be welcomed in the City following sharp downgrades to earlier predictions on Threadneedle Street as recession deepened.

Chancellor Alistair Darling is expected to offer a similar forecast in the Budget tomorrow, although some in the City are less optimistic about the pace of recovery.

Sentance said: “Our February central projection suggested that the pace of the downturn would ease in the current quarter with the economy bottoming out over the summer.

“On this central scenario, we saw the prospect of a slight improvement in the economy later this year and more significant growth as we moved through 2010.

“Though there are still a lot of risks, the economic data since February has been broadly consistent with this projection.

“Some of the business survey data is now more positive — albeit from a low base.

“There are tentative signs of a pick-up in housing market activity. And UK exports do not seem to be falling as sharply as other countries.”

He said inflation has not fallen as fast as the Bank predicted. Figures today showed the Consumer Prices Index rate of inflation at 2.9% last month down from 3.2% in February.

Paul Fisher, who joined the influential MPC last month, said there is still a risk that inflation will fall below the 2% target.

But he told MPs on the Treasury Select Committee that it is too early to say whether the £75 billion programme of quantitative easing launched by the Bank in an effort to drag Britain out of recession and stave off deflation is working.

“It must be done quickly and in scale,” he said. “This hasn't been done in the UK before, so no one knows exactly how successful it will be.

“But in the current macroeconomic circumstances I am confident that it is the right thing to do and that it will help.

“I am less confident about precisely how much we should do, and there are risks both of doing too much and of doing too little.”

Fisher added: “The main downside risk to economic growth in the United Kingdom is the possibility of the world economy growing even more slowly than expected.”