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Monday 25th of May 2009
October 22, 2008

BoE Governor issues recession warning

by Kay Murchie

The Bank of England’s Governor, Mervyn King, has issued a stark warning that the UK economy is on the verge of a prolonged recession. Mr King added that he is concerned about rising unemployment and tumbling house prices.

Following his announcement, the pound plummeted to a five-year low against the dollar to $1.6331.

Meanwhile, the euro also fell against the dollar to $1.2743 this morning - its lowest level for almost two years.

The dollar has strengthened over recent days after the US Federal Reserve’s chairman, Ben Bernanke, approved another cash boost to encourage spending and promote consumer confidence in the US.

The BoE, together with the National Institute of Economic and Social Research (NIESR) are predicting that the UK economy will enter recession in 2009.

The NIESR is forecasting that Britain’s economy would shrink by 0.9% in 2009 and warned that if the Government’s £50 billion banking rescue package was unsuccessful, the recession could be even more profound.

The news comes just a few days after the Ernst & Young Item Club claims that Britain is now in a recession that will last for 12 months, with only a weak recovery in 2010.

Peter Spencer, the chief economist at Ernst & Young, said the economy fell sharply in the previous quarter and will shrink for three more quarters before bottoming out in the latter half of 2009.

Britain has been on the brink of recession since the end of June, when the economy came to a standstill with official growth at zero.

Meanwhile, economist Roger Bootle, believes that interest rates in the UK could fall below the 2% mark, the lowest figure since the Bank of England was established in 1694.

Mr Bootle predicts a fall to 3.5% by the end of the year and 2.5% or 2% by spring and lower if the economic situation deteriorates.

Earlier this month, the Bank of England, along with six other central banks cut interest rates by 0.5%.

Official figures last week revealed that UK inflation hit 5.2% in September, the highest level since March 1992, and more than twice the Government’s target of 2%.

However, while Mr King said the Bank was committed to bringing inflation back towards the 2% target, he more than hinted that there would be no rate rises for the foreseeable future.

Mr King went on to say that not since the start World War I had the banking system been so close to collapse.

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