"Deep recession" has taken hold
The Bank of England's quarterly inflation report and accompanying press conference make for gloomy reading
With the prospects for economic growth and inflation “unusually uncertain” and the UK in “deep recession”, according to the Bank’s governor Mervyn King, the need to restore confidence in the markets and particularly the financial sector is paramount. But the demise of the global banking sector has done irreparable damage to the idea of corporate governance and investors are being squeezed from all sides.
The Bank now expects inflation to fall to just 0.5% in two years, well below its target of 2%, implying the need for continued easing in monetary policy, which is likely to include the buying of gilts as well as less conventional methods, King said at Wednesday’s press conference.
Amid rising criticism over the ability of further interest rate cuts to promote consumer spending, King moved to defend the Bank’s recent decisions. "Monetary policy is by no means ineffective, and when combined with the sharp fall in sterling of more than a quarter since the summer of 2007, the fall back in commodity prices and the easing in fiscal policy will provide a significant boost to demand," he said.
After last week cutting interest rates to a record low of 1%, the next BoE Monetary Policy Committee meeting is due to take place on 5 March, where the Bank is now expected to take another 50 basis points off the rate. However, King said today that policy makers will have to start using new tools before rates fall to zero, admitting that we are approaching “the point where the efficiency of further cuts is diminished.”
The Bank now forecasts the economy to contract at an annual rate of 4% rate by the end of the first quarter of 2009, but the length and depth of the recession will depend to a significant extent on developments in the rest of the world where a severe economic downturn has taken hold, King cautioned.
The release of the Bank’s inflation report followed that of the latest labour market report, which revealed UK unemployment has hit its highest level since 1999. The number of people receiving unemployment benefits rose 73,800 to 1.23 million in January, according to figures from the Office for National Statistics, while the number of unemployed increased by 146,000 to 1.97 million in the three months to December.
Whilst the last UK recession of the 1990s hit the manufacturing sector the hardest, the current recession’s roots in the financial industry has meant a greater proportion of higher income earners have felt the pinch.
After almost a decade of economic ‘boom’, when investors enjoyed a plethora of investment opportunities, today’s ‘bust’ means that the same investors are struggling in their search for secure investment ideas while trying to deal with the triple whammy of a property, stock market and banking crash, not to mention job loss or insecurity.
