In its Inflation Report, the Bank of England revised downward its projections for output and inflation. To reduce lending costs, the Bank expanded its asset purchase programme in July and set up the so-called Funding for Lending Scheme in August. Further monetary easing depends on the impact of these two programmes.
- In its Inflation Report, the Bank of England projects GDP to GDP projections based on market interest rate significantly pick up in the second half of 2012, partly due to the expectations and GBP 375 billion asset purchases unwinding of the extra bank holiday in Q2 (effect around 0.5%). For the year as a whole, growth will be close to zero on average. The Bank expressed some doubt about the GDP statistics, suggesting that they might have underestimated growth. Nevertheless, it conceded that output has been at best broadly flat over the past two years.
- Inflation has come down to 2.4% in June from 5.4% last September, partly due to the VAT hike falling out of the year-to-year comparison. Inflation is expected to ease further and to be around or a little below target for much of the forecast period, due to easing commodity prices and subdued domestic cost pressures. The Bank’s projections are in line with our own forecast (see Eco Perspectives July 2012).
- The BoE expects that developments in the eurozone have a pervasive impact on the UK economy, not only through trade but also through their impact on credit conditions and uncertainty. The Bank did not consider the euro break-up in its risk assessment. However, concerns about the possibility of such event are likely to play a role in financial markets in the form of higher lending costs. Moreover, they could undermine confidence.
- In the past, the Bank tried to reduce lending costs by its Asset Purchase Programme. This programme was last increased in July by GBP 50 billion to GBP375 billion (or 22% of GDP). In cooperation with the Treasury, the Bank has set up the so-called Funding for Lending Scheme, which provides cheap funding for banks that step up their lending to the non-financial private sector. The scheme could boost the stock of lending by GBP 80 billion (or 5% of GDP). The Fund started operating at the beginning of this month and will be terminated by the end of January 2014. During his press conference Governor Mervyn King indicated that the first results are positive. In November, he hopes to report more about the initial effects. Further monetary easing depends on the impact of these two programmes.