The Bank of England Inflation Report makes for grim reading.
The Bank now expects growth in 2012 to be around zero per cent. More worryingly it has slashed its medium term forecasts and Mervyn King today refused to rule out the possibility of a ‘lost decade’.
The Bank has identified four problems holding the economy – the squeeze on household incomes and living standards, the fiscal squeeze of austerity, the squeeze in credit and the ongoing mess that is that the Eurozone.
We have a triple squeeze holding back domestic demand whilst the Eurocrisis depresses exports.
As the Bank puts it:
Most directly, the resultant weak growth in the euro area has, alongside slowing growth elsewhere in the world, held back UK export growth. Other factors have also weighed on UK demand, including a real income squeeze, tight credit conditions and the fiscal consolidation.
The Bank hopes that falling inflation will provide some relief to the living standards squeeze. But as their chart of private sector pay settlements shows, pay growth is also weakening.
On the credit squeeze the Bank hopes that the new funding for lending scheme will help but seems doubtful that it will provide a substantial boost to credit growth. It notes that banks may use the scheme to boost profits and capital rather than cut lending costs (this Alphaville post discusses the possible impact on profit by bank) and seems reluctant to put any figures on the exact impact on loan growth.
As for the fiscal squeeze and the Eurocrisis – these ones are out of the Bank’s hands.
Four problems identified – a partial solution to one, fingers crossed on the other three.
In the end the Bank can only do so much and it increasingly seems that monetary policy has hit the limits of its effectiveness.