Economy slow down predicted by Bank of England

According to the latest economic analysis from the Bank of England, the UK economy will remain weak for the rest of this year.

The Bank’s quarterly inflation report indicated that although the economy was expected to begin to recover in 2002 the current pressures on the euro zone economic area were intense.

However, while the RPIX inflation figure, which had reached 2.4 per cent in May and June, was due in part to temporary factors, including an unusual increase in seasonal food prices, the figure for inflation had remained below the target of 2.5 per cent.

At a press conference announcing the report, the Bank’s Chief Economist Mervyn King said the “tale of two economies” had intensified since the previous inflation report in May of this year.

He said that at a meeting the Monetary Policy Committee last week, they had discussed economic projections in the light of imbalances in the economy: “To cut rates would run the risk of overstimulating consumption, and exacerbate the size of the adjustment that will ultimately be required. To fail to cut would run the risk of undershooting the inflation target and unnecessarily depress activity. No one pretended that the decision was easy. It is true that markets were not expecting a reduction in interest rates last Thursday, although the possibility of some further reduction over the next 2-3 months was priced into financial contracts.”

He said the decision to make a modest reduction in interest rates would keep inflation on track to meet the two-year 2.5 per cent inflation target. The Committee had also taken into account that manufacturing is in recession and consumer spending is buoyant. The gap between the growth of services and manufacturing output in the second quarter is the largest since 1980.

Mr King said the profit rate in manufacturing had fallen steadily from nearly 11 per cent in 1998, to under four per cent in the first quarter of 2001 - the lowest figure since 1992.

In their report the Committee admitted surprise at a reduction in business investment, attributed to increasing pressure on company finances and had downwardly revised their projection for business investment. (SP)