Tuesday, Andrew Sentance, a Monetary Policy Committee member of the Bank of England said the economy might emerge out of recession during the course of the year and into 2010. At present, the key challenge is to support demand and help lift the economy out of recession and head off the deflationary risks associated with it, he added.
Accordingly, the monetary policy will face a different challenge when the recovery comes, including upside and downside risks to inflation, the policymaker said.
Sentance noted, As a member of the MPC, I remain committed to keeping the UK economy on as steady a course as we can, while recognizing that the integrated global economic system is always throwing up new and challenging problems for us to deal with.
The UK economy as well as the global economy would need to correct some significant economic imbalances and the path ahead in the recovery phase may not be so smooth, he said. There remain potential sources of volatility to both growth and inflation in the short-term.
Recent reports signal that the downward momentum of inflation in the short-term may not be as strong as assessed in February, probably on considerable depreciation in sterling since the summer of 2007, the rate setter pointed out.
According to Sentance, the May Inflation Report will give an updated forecast for economic growth, and the MPC's latest assessment of the course of the recession and prospects for recovery. He sees the prospect of a slight improvement in the economy later this year and more significant growth moving through 2010.
Consumer price annual inflation in March fell to 2.9%, lowest level in an year. Meanwhile, retail prices dropped 0.4% in March, after staying flat in February. The annual rate turned negative for the first time since March 1960.
According to the British Chambers of Commerce, deflationary pressures could make the recession worse in the short-term, despite quantitative easing and the huge budget deficit posing inflationary pressures over the medium-term.
Meanwhile, in a Parliament Treasury Committee hearing on Tuesday, Executive Director of the BoE, Paul Fisher said he would not want to say worst is over. The recovery from here on will be quite slow and bumpy. He said the bond purchases program planned by the central bank is of 'about the right size.'
The Confederation of British Industry on Monday forecast a slow and fragile recovery in the UK with growth resuming only in the spring of 2010. The industry lobby said the recession deepened more than expected in the first quarter of this year, but it is forecast to moderate in the second half of the year. The CBI revised down its GDP forecast for 2009 to a 3.9% contraction compared to an earlier estimate of a 3.3% GDP decline.
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