Medium-term outlook uncertain for Britain

While surveys have pointed to some improvement in the British economy, the outlook remains highly uncertain and may not become clear until late autumn, Bank of England Deputy Governor Paul Tucker said yesterday. In a speech to the Association of British Insurers, Tucker also said the market was right to assume BoE would tighten monetary policy when the inflation outlook warranted it but stressed the need to maintain perspective. Markets are currently pricing in interest rates rising only early next year. "Since the beginning of the year I have felt it will take until late autumn to have any kind of a handle on what type of outlook we face. My view on that hasn't really changed," he said, according to the text of his speech. "Over recent weeks near-term indicators, notably the business surveys, have improved a bit… But a sense of perspective is needed if these apparently small steps forward are not to be frittered away. Inevitably, the medium-term outlook remains highly uncertain and the path back to anything like normality can only be gradual." A number of indicators in recent days have been pointing to the worst being over for the British economy which shrank by 1.9 per cent in the first three months of the year. In particular, one purchasing managers' report indicated the service sector returned to growth in May. But Tucker said he was concerned whether the financial system was capable of generating enough credit to foster recovery, given that while the reopening of high-grade bond markets had been encouraging, bank lending was subdued. It is in the interests of the banks to get lending going again, he said. Otherwise, recovery will be anaemic at best. The deputy governor's caution on the economy was mirrored by Finance Minister Alistair Darling who was quoted yesterday as saying economic data in Europe had been worse than expected. "A number of indicators are showing confidence is coming back… But there are reasons to be cautious. The European economy and some of its member states are hit a lot harder than we thought," Darling was quoted as saying. BoE has kept interest rates at a record low of 0.5 per cent since March and embarked on a £125 billion (Dh734bn) programme of quantitative easing to try and boost the economy. Tucker said he preferred the central bank's current approach instead of committing to keeping rates low for a specific period. Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here .