UK economy ailing, BoE seen keeping options open

LONDON (Reuters) – Bank of England Governor Mervyn King is seen leaving the door open for more support for Britain’s struggling economy on Wednesday, prompted by escalating dangers from the euro zone.

The Bank is expected to cut its growth forecast and nudge up its medium-term inflation prediction towards its 2 percent target – a sign that while more stimulus is not immediately on the cards, it could come if conditions worsen.

King will face questions, after releasing the quarterly Inflation Report, over the Bank‘s decision last week to halt the money printing press, as worries over high inflation trumped concerns about an economy which has slipped back into recession.

With the government’s hands tied by its pledge to erase a huge budget deficit, and the economy well below its pre-crisis peak, King will also have to answer critics calling on the bank to support firms and consumers more directly.

The economy has not fully recovered from its 2008-2009 slump, but King said earlier this month that Britain seemed on course for a slow, steady recovery later this year, citing more upbeat business surveys and a recent rise in employment.

Labour market figures for March – due one hour before King starts a news conference – may provide support as economists expect a stable unemployment rate of 8.3 percent.

Most economists think the central bank will be reluctant to engage in another round of asset purchases with newly created money, known as quantitative easing, after buying a total of 325 billion pounds in gilts to support the economy.

“A desire to leave options open and never pre-commit to anything means that the door for more QE may be explicitly held open in the press conference,” said Nomura economist Philip Rush. “Moreover, Mervyn King may add his usual dovish overlay relative to the report.”

The forecasts in the Inflation Report provide important guidance for future policy. An above-target inflation prediction in the 2-3 year horizon would indicate the need to tighten, while a clear undershoot would give room for stimulus.

But since the financial crisis, the Bank has consistently overestimated growth and underestimated inflation.

In its February report, the Bank pencilled in a robust first quarter rebound after the economy contracted in late 2011 and predicted inflation would fall below its 2 percent target later this year and stay there for the next two years.

But the economy flat lined in the first quarter, falling well short of the Bank’s forecast of 1.1 percent annual growth, while inflation averaged 3.5 percent, above the Bank’s prediction.

A Reuters poll showed on Tuesday, that economists predicted growth of just 0.4 percent for 2012 and 1.6 percent for 2013, well below the Bank’s February prediction.

(Editing by Jeremy Gaunt.)