Britannia Radio

There's quite a bit of fudging here but the message is clear.

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BBC ONLINE   12.11.08
Bank says UK already in recession

The Bank of England says the UK entered a recession in the middle of 
2008 which will continue well into 2009.

In its quarterly inflation report, the Bank warns that the economic 
landscape has changed dramatically since August.

It now expects inflation to decline to 1% by 2010, below its 2% 
target, in a dramatic change to its last forecast.

This could open the way for further interest rate cuts if the Bank is 
to maintain inflation at its target rate in two years' time.
"We are certainly prepared to cut bank rate again if that becomes 
necessary," said Mervyn King, the Bank of England's governor.

His comments came after unemployment hit an 11-year high, while the 
pound sterling fell further on international markets.

The Bank of England's central projection is for the economy to 
contract by 2% by early next year - although this may change if the 
government introduces further fiscal stimulus to the economy.

In August, the Bank forecast "broadly flat" economic growth.
Ross Walker of the Royal Bank of Scotland told the BBC that markets 
were surprised by how big a fall in inflation the Bank of England had 
projected, and said he now expected another rate cut in December of 
at least 0.5%.

"Conditions are going to get worse before they get better," he added.

Financial crisis
The governor said that "we have seen the biggest banking crisis since 
World War I", coupled with a dramatic fall in business and consumer 
confidence, and very sharp drops in commodity prices.

In its inflation report, the Bank says: "The process of financial 
sector consolidation and balance sheet adjustment became increasingly 
disorderly. Concerns about banks' solvency and strains in global 
money markets reached unprecedented levels."

Mr King said that the Bank had acted to cut rates so sharply "because 
the facts had changed" and rejected criticism that it was caught 
unawares by the crisis.

Markets are expecting rates to go below 2% within a year, the lowest 
Bank of England interest rate since it was set up in 1694.

And the governor admitted that Retail Price Index inflation, which 
includes housing costs, could actually become negative as interest 
rates fell.

Oil prices have already fallen to below $60, a cut of more than half 
since their peak in the summer.

A long recession?
Deputy governor Charles Bean said that the contraction in the UK 
economy would be broadly similar to the declines seen in Sweden, 
Finland and Norway in the 1990s, which were deep but relatively short-
lived.

He pointed out that the early moves to recapitalise the banking 
sector should help limit the depth of the recession - in contrast to 
the situation in Japan, where a slow response from government 
extended the recession.

He also said that the 20% devaluation of sterling could help boost 
exports and pull the economy out of recession.

The governor, however, pointed out that too great a fall in the value 
of the pound could lead to further inflation in the future.  [That's 
known as 'hedging your bets' -cs]

Fiscal stimulus
Mr King said that there was a stronger argument for fiscal stimulus 
than previously, because the banking crisis had meant that monetary 
policy was less likely to be effective.

But he warned that any short-term fiscal stimulus had to be temporary 
and consistent with the long-term path of fiscal discipline.

Otherwise, he warned, long-term interest rates would rise, undoing 
some of the effects of any economic boost.

In the House of Commons, Gordon Brown said that he had to employ 
"very special means to deal with special circumstances" and said that 
a worldwide fiscal stimulus was needed to counteract the slowdown.

The government is expected to announce its new spending plans as 
early as next week in the Pre-Budget Report.

International agreement
Mr King said that a new international agreement on regulating the 
world financial system was important for a long-term resolution of 
the crisis.

He said that he was hopeful that the meeting of world leaders in 
Washington at the weekend could make a useful start on a "process of 
reform" that would take some months.

The governor said that the objective should be to ensure that 
countries which had capital surpluses, such as China, also had an 
obligation to take action to correct financial imbalances.

And he added that this was exactly the problem that the economist 
John Maynard Keynes had identified when the system of international 
financial rules were set up in 1944 at Bretton Woods.
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CONSERVATIVE HOME Blog - Centre Right  12.11.08
The Bank of England Inflation Report: Grim and Grimmer   [EXTRACTS 
because of incompatible graphs-cs]
I don't usually write you commentaries on the Bank of England's 
inflation report - you don't pay me enough for that.  And I'm not 
going to offer you much detail today.  But a few points from it are 
so striking that you really need to get hold of them.

First,[we have]  GDP projection based on constant nominal interest 
rates at 3%:

What does it say?  It says that the Bank is now expecting GDP to 
contract 2% from October 2008 to September 2009, and it thinks there 
is a 15% or so probability that GDP will contract by more than 3% in 
that period. - - - - - -We can see the point that we knew - lower 
interest rates are not expected to have any effect upon this phase of 
the recession.  Their effects (such as they are) will come later.

Next,[we have] CPI inflation projection based on constant nominal 
interest rates at 3%:

This one says that the Bank expects inflation to drop below 1% by 
2010 (at current interest rates), and that there is a 25% chance of 
deflation by that point.  That's pretty sanguine, in my view.  This 
morning's FT reports the "break even inflation rate" for UK 2.5% 2011 
bonds - i.e. the inflation rate between now and 2011 at which one 
would be indifferent between index linked and non-index-linked bonds, 
which is a measure of the inflation rate that the market expects over 
that period - as -0.91% (i.e. financial markets are expected 
deflation of around a percentage point between now and then).  The 
Inflation Report notes (p11) that "in 2008 Q3 annual real broad money 
growth was negative, for the first time since the early 1980s".  So 
we are in the mother of all monetary slowdowns, comparable with a 
period of policy-induced real contraction that got inflation from 
above 20% down to less than 4% in under three years.  I think 
deflation is nailed on.  The only question is how much.

At the press conference, Governor Mervyn King is reported by the BBC 
as saying that there was "a stronger argument for fiscal stimulus 
than previously, because the banking crisis had meant that monetary 
policy was less likely to be effective".  I don't see any references 
to him saying that "the cupboard is bare" or that it would be 
impossible to finance a fiscal stimulus because no-one will lend us 
the money.  He did warn (as I have done) that "any short-term fiscal 
stimulus had to be consistent with the long-term path of fiscal 
discipline.  Otherwise...long-term interest rates would rise, undoing 
some of the effects of any economic boost."  So now our Frontbench 
team has set itself against the Governor of the Bank of England.  
They say fiscal stimulus is impossible.  He says it's possible.  He's 
right.