BANK of England Governor King admitted yesterday that risks to the UK economy from ‘difficulties facing the euro area’ are ‘impossible to quantify’.
King was presenting the Bank’s quarterly inflation report.
Announcing that the Bank was cutting its growth forecast for this year to 0.8% from 1.2%, King claimed that ‘there is as much chance that growth will be above as below its long-term average’.
He admitted: ‘These changes in the outlook for growth are small in the context of the overall uncertainty we face.’
He went on: ‘The big picture remains one in which the economy gradually recovers.
‘The biggest risk to the recovery stems from the difficulties facing the euro area, our main trading partner.
‘As in recent reports the committee believes that there is no meaningful way to quantify the most extreme possible outcomes and they are therefore excluded from the plan charts.
‘But even the threat of those more extreme outcomes is enough to affect the outcome for the UK, for its effect on bank funding costs, asset prices including the exchange rate and confidence in households and businesses.
‘And such effects are incorporated in the plan charts.
‘Now at 3.5 per cent in March CPI inflation remains well above the 2 per cent target.
‘That largely reflects vast increases in energy and import prices.
‘In contrast low rates of wage increases have ensured that domestic cost pressures are subdued.’
Later, questioned by reporters, King went further, saying the eurozone was ‘tearing itself apart’ and the UK would not be ‘unscathed’.
He told a news conference that the euro area posed the greatest threat to the UK recovery, and there was a ‘risk of a storm heading our way from the continent’.
‘We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.
‘The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic,’ King said.
The Bank’s report said that the eurozone crisis was not the only issue weighing on the UK economy, with volatile energy and commodity costs, and the squeeze on household earnings also having an impact.
It all meant that the UK economy would not return to pre-financial crisis levels before 2014, King said.
Nevertheless, he remained cheerfully optimistic, saying: ‘We don’t know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back.’
On ‘quantitative easing’, he said that no decisions had been made whether or not to continue printing money. The last ‘stimulus’ programme was still ‘working its way through the system,’ he said.