Eurozone Crisis Halting UK Economic Recovery | Prepaid365

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16 May 2012

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Sir Mervyn King has warned that the continuing crisis in the eurozone is hampering Britain’s efforts to recover from financial meltdown.

The governor of the Bank of England has said that Britain is recovering from the biggest financial crisis in its history, but is being held back by a eurozone that is “tearing itself apart”.

Speaking ahead of the Bank of England’s publication of its quarterly inflation report, King said there was no clear-cut solution to the eurozone problems.

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution,” said King.

“The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2% strikes me as wholly unrealistic. We’re bound to be buffeted by this and affected by it,” he added.

Citing financial problems across Europe, the Bank of England has reduced its growth forecasts for the next two years and warned that inflation will not fall as quickly as first hoped.

The central bank has cut its forecast for growth from 1.2% to 0.8% for this year, and from around 3% to 2% for next year.

The government’s inflation target of 2% looks even further away now, as the Bank of England stated that it wouldn’t be reached for at least year. The bank said that inflation would stand at around 2.5% at the end of this year.

However, it was predicted that inflation would be around 1.6% in two years’ time – compared to the bank’s previous prediction of 1.8%, which it made in its February forecast.

“We don’t know when the storm clouds will move away. But there are good reasons to believe that growth will recover and inflation will fall back,” King told a news conference.

Commentators and financial experts noted that the door was left open for further rounds of quantitative easing (QE) in the future, should the economy continue to struggle.

The central bank is unlikely to want to undertake further asset purchases, after £325 billion in purchases since 2009. But it has recognised that there may be no other option.

“We suspect that the Bank of England would prefer not to do more QE, but is prepared to act if underlying economic activity fails to improve,” said Howard Archer, a European economist at IHS Global Insight.

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