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Sir Mervyn King: The Economy Will Be Flat For The Next Six Months

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MERVYN KING
AP

Bank of England governor Sir Mervyn King has told MPs economic growth will be flat for the next six months as the unfolding eurozone crisis threatened the UK's recovery.

Sir Mervyn warned the Treasury Select Committee "painful adjustments" need to be made irrespective of how the problems in the 17-nation currency bloc pan out - but it would be better for changes to be made in "orderly way than a disorderly way".

The Governor and fellow colleagues from the Bank's Monetary Policy Committee (MPC) were discussing the findings of the quarterly inflation report published earlier this month, in which the body forecast a heightened risk of a double-dip recession.

The hearing came as the Organisation for Economic Co-operation and Development (OECD) warned the UK economy is set to contract in the final quarter of 2011 and first quarter of next year.

Sir Mervyn told MPs: "Going forward we are concerned that problems in euro area could lead to weaker exports than we expected."

He added: "I have not seen the OECD documents. But I think what's important is not whether growth is plus 0.2% or minus 0.2% but that we have a framework in place that will help growth pick up."

In its quarterly inflation report, the bank slashed its central, or most likely, growth estimate to around 1% in both 2011 and 2012 - but compared to previous forecasts the Bank's projections reveal a greater chance of the economy shrinking in the first three quarters in 2012.

Howard Archer, chief UK and European economist, said the testimonies reinforce the belief that it is "very much a question of when, rather than if" the Bank of England will enact another round of quantitative easing (QE) following October's £75 billion top up.

He said: "The MPC sees the economy essentially stagnant until mid-2012 and acknowledges that there are significant downside risks to this outlook, primarily resulting from the danger of further deterioration in the eurozone situation."

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