Bank of England in new economy warning

It is not just the uncertainty in the eurozone and the risk of a "disorderly" collapse of the single currency that threatens the UK economy,…

It is not just the uncertainty in the eurozone and the risk of a "disorderly" collapse of the single currency that threatens the UK economy, the Bank of England has warned.

Minutes of this month's Monetary Policy Committee (MPC) meeting showed the decisions to maintain the base rate at 0.5 per cent and the asset purchases scheme at its current level both being supported by all nine members.

Describing the prospects for the economy, growth and inflation, the MPC noted even the fear of a possible collapse of the euro could suppress domestic economic activity for some time to come.

In addition to this, it said: "The risk of a sharper slowdown in emerging economies [i.e. Asia] could also not be discounted, although monetary policy had been loosened in a number of countries and further stimulus was possible."

Underlying the significance of such a possible development, the MPC noted: "The larger Asian economies and banks were more important to the global trade and financial system than at the time of the Asian crisis of the late 1990s."

Any new shocks that damage the world economy and have a consequent knock-on effect on Britain could lead to more businesses struggling and failing, further job losses.

This would cause more debt as many people who could manage to make monthly payments while in work would suddenly find they could no longer do so.

The only positive factor that could emerge from any Asian downturn would be a fall in commodity prices, the MPC noted. This would be caused by a reduction in demand for oil and other raw materials, which could help keep inflation down.

With the decisions on rates and quantitative easing being made on September 6th, these decisions preceded the news this week showing consumer prices index inflation fell from 2.6 per cent to 2.5 per cent last month, continuing progress towards the two per cent target the MPC is tasked with trying to hit.

By Joe White
 

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