The Chancellor George Osborne said the Governor of the Bank of England is "right on the big picture" in his growth forecasts for 2012. He insisted the economy is "healing" but said it was a "slow and difficult process" that involves "deep rooted problems at home" as well as as from abroad.
I think the Governor of the Bank is right on the big picture, which is the economy is healing, but it is a slow and difficult process and we're dealing with some very deep-rooted problems at home and some storms from abroad, but the deficit is down, inflation is coming down, growth is disappointing and now we've got to have the undivided attention of the Government to do everything possible to get the economy moving.
– George Osborne, Chancellor
I think the Government now has an opportunity to give its 110% attention and effort and energy to getting the economy moving and using time available in Parliament to do just that.
When you look at what the Governor of the Bank is saying today, he is saying the economy is healing - I think that's significant - but there are still many challenges and the job of the Government is to address those challenges, that's precisely what we're going to do.
The chief economist of PwC said the Bank of England's prediction of no GDP growth this year is historic.
It seems likely that we have entered a 'new normal' period where growth will be relatively subdued by historic standards for some years to come as the banking system remains impaired and global commodity prices remain relatively high and volatile.
– John Hawksworth, PwC
On the brighter side, inflation looks set to fall back to target over the next year, which should ease the squeeze on consumer finances. We would therefore expect the MPC to sit on its hands until at least November before considering any further changes in monetary policy.
Labour MP Rachel Reeves said today's inflation report by the Bank of England which slashed growth predictions from 0.8% to 0% showed the government must accept their plan 'A' to cut the deficit and stimulate growth is not working. She said:
"The economy has now shrunk over the last two and a bit years, since the coalition came to power, unemployment is higher since the coalition came to power and the deficit has actually increased."
ITV Business editor Laura Kuenssberg asked the Governor of the Bank of England Sir Mervyn King should the public accept that the recovery was not going to take hold and get used to being poorer.
He said the UK will get back to the same levels of growth experienced before the crisis, but that it was "quite impossible to know over what time period."
King also said that it was important to bear in mind that although the crisis started five years ago, the policy measures taken at the time meant that the impact on spending was reduced. This is no longer the case.
TUC General Secretary Brendan Barber said the Bank of England's quarterly inflation report showed the government must "call time on self-defeating austerity" and look for new ways to get the economy growing. He said:
"We all know the economy is currently stuck in a rut but it’s now looking less like a blip and more like a much longer slump.
The UK’s dire economic performance is causing permanent damage and putting thousands of jobs on the line. It is not good enough for the Chancellor to stand by and rely on the Bank’s monetary policy measures to get us out of this mess.
With all the main forecasts now pointing towards a lost decade, it’s time for the government to call time on self-defeating austerity and start looking at ways to stimulate the economy."
The Governor of the Bank of England Sir Mervyn King has the crisis in the euro area is continuing to hit demand for UK exports and efforts to rebalance the economy "will require patience." He said:
"GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.As I have said many times, the recovery and rebalancing of our economy will be a long, slow process."
The Bank of England's latest inflation report shows the clear need for "stimulus measures" including quantitative easing to get the economy growing again, according to Capital Economics chief UK economist Vicky Redwood:
This year’s forecast for GDP growth has been cut from 1.3% to about zero. And even at the end of next year, growth is now expected to be closer to 2% than the 3% previously forecast.
What’s more, these forecasts still don’t directly account for the more extreme downside risks stemming from the euro-zone. Meanwhile, inflation is projected to get back to its 2% target more quickly than expected in May.
And it is expected still to be below the target in two years’ time – even based on market expectations of a 0.25% rate cut by the middle of next year.
Accordingly, the door is clearly open to more stimulus and we still expect both more QE and a further interest rate cut in November.