Wednesday, November 12, 2008

Britain Likely In Recession

Source : The Straits Times, Nov 12, 2008

LONDON - THE Bank of England said on Wednesday that the British economy was probably already in recession as a global financial crisis takes its toll.

'The economy probably entered recession in the second half of 2008 and output is likely to contract further,' said the Bank of England in its latest quarterly report. -- PHOTO: AP

'The economy probably entered recession in the second half of 2008 and output is likely to contract further,' the central bank said in its latest quarterly report.

Britain's economy shrank 0.5 percent in the three months to Sept from the previous quarter, marking the first contraction since 1992, according to recent official data.

The economy had already shown flat performance in the second quarter with zero growth. However, Britain is not officially in recession unless it reports two quarters running of negative economic growth, or contraction.

The BoE statement implies that the central bank believes that the economy is contracting in the current fourth quarter, or three months to the end of Dec. -- AFP

Inflation to fall below 2%: BoE

LONDON - THE Bank of England warned on Wednesday that it expects inflation to fall below the government's target of 2 per cent next year as the economy contracts further, stoking expectations that the Bank will lower its benchmark interest rate - possibly to the lowest level ever.

Inflation rose to 5.2 per cent in Sept, under severe upward pressure from fast-rising food and fuel prices.

But the British economy is now teetering on the brink of a recession, and the Bank of England expects that lower consumer and business spending resulting from the broader economic slowdown will cause prices to stop rising - leading to sharply falling levels of inflation.

'Inflation will fall below targets,' Bank of England governor Mervyn King told journalists at a press conference, 'But we aim to get back there in the medium term.'

The biggest weapon in the Bank of England's arsenal to control inflation is the base interest rate. Cutting interest rates tends to increase inflation by stimulating spending, and lower it to boost growth.

The Bank of England slashed its benchmark interest rate earlier this month by 1.5 percentage points in an attempt to shore up the economy as it sinks into recession, a bold cut that far exceeded economists' expectations.

The cut to a 3 per cent base rate left rates at levels last seen in the 1950s.

Economists are viewing Wednesday's report as evidence that further interest rate cuts are likely to follow soon.

'The report reveals that if interest rates were held at 3.0 per cent, inflation would likely fall close to 0 per cent in 2010,' said Mr Richard Snook, senior economist at the Center for Economics and Business Research.

'This implies that further interest rate cuts, probably to 1 percent by the end of 2009, are certain.'

The record low for the bank's base interest rate is 2 per cent since the bank's founding in 1694 in the reign of William and Mary. -- AP

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