–Sees Growth Weak Through H1 2012; Scope To Boost QE Purchases
–Sees Still Scope To Bring Down Yields At Long End
–Sees Inflation Falling Sharply Between Now And March
–Risk Inflation Persistence Esp. If Euro Crisis Doesn’t Escalate
–Sees Credibility Could Pose Potential Constraint On QE

LONDON (MNI) – Business surveys suggest that the UK recovery likely
stalled in the final quarter of this year, Bank of England Chief
Economist Spencer Dale has said.

In a speech here, Dale said his view was that growth was likely to
“remain very weak during the first half of next year, before gaining
some traction thereafter as the squeeze on households’ real incomes
comes to an end”.

But Dale warned that this recovery would depend on the euro zone
being able to implement a “credible and effective response” to the
crisis.

“Failure to do so, poses the single biggest threat to our
recovery”, he continued.

Dale insisted that the BOE had scope to boost QE purchases if
needed and said that there was still room to bring down yields at the
long end of the curve.

“There is certainly scope, if necessary, for us to increase our
programme of asset purchases. Indeed, there are more gilts outstanding
now than when we first started QE in March 2009,” he said.

A more real limit on QE could be posed if credibility in the
programme waned, he warned.

“The more binding constraint might be if the credibility of asset
purchases started to be questioned. But that is likely to depend on the
economic circumstances rather than the scale of purchases per se”.

Dale blamed the sharp deterioration in the growth outlook seen over
the past 3 months or so squarely on the euro zone crisis, saying that
the “spectre” of a “further leg” to the crisis caused a sharp loss in
business and consumer confidence.

“Although the euro crisis might not account for the weakness
evident over much of the past year, I do fear that the dark cloud
hanging over the other side of the channel is casting a growing shadow
over our economy”.

The BOE chief economist warned that there were “limits” on what
monetary policy could do to protect the economy from external events,
like the euro zone.

“I expect that developments within the euro zone will continue to
have an important bearing on our economic fortunes for some time to
come”.

Dale said that there was a risk that bank funding strains could
start to re-tighten credit conditions if these strains did not ease
quickly, but that evidence from the BOE agents’ surveys suggested that
so far this was not happening.

Looking ahead to inflation prospects, Dale said that CPI would
fall sharply between now and March – as the VAT rise and petrol price
rises dropped out of the annual comparison.

“These base effects alone should pull down on inflation by between
1.5 to 2.0 percentage points by the end of 2012… Barring some large
and unanticipated price increases, CPI inflation looks set to come down
to the low 3’s by March next year”.

But it was important to see what happened to the inflation trend,
once major base effects to the annual rate had dropped out, Dale said.

While there was “certainly a possibility” inflation could fall
clearly below the 2% target, there was a risk – especially if the euro
zone crisis did not worsen – that it could be more persistent and that
firms’ and households’ inflation expectations might not fall as quickly
as expected.

Dale said he was confident that the BOE would be able to exit
its present “exceptional policy” as needed.

“In the near term, with markets not pricing in a rise in Bank Rate
until the second half of 2014, there is considerable scope for the
stance of policy to tighten simply by the expected timing of future rate
increases being brought forward”.

–London Bureau; Tel: +4420 7862 7492; email: dthomas@marketnews.com

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