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BoE warns of EU crisis storm

Bank of England Governor Mervyn King said officials have prepared for dangers posed by Europe’s debt crisis, after the bank lowered growth forecasts and raised predictions for inflation this year.

“Contingency plans have been discussed and have been for a considerable time,” King said at a Press conference to present the bank’s quarterly Inflation Report on Wednesday in London. “We are navigating through turbulent waters with the risk of a storm heading our way from the continent.”

Meanwhile, UK jobless claims fell for a second month in April and a wider measure of unemployment dropped in the first quarter, providing further evidence of stability in the labor market.

Jobless-benefit claims fell by 13,700 from March, the biggest drop since July 2010, to 1.59 million, the Office for National Statistics said on Wednesday in London.

Greece is heading for new elections after a political stalemate that’s sent stocks across Europe lower, pushed up bond yields and raised concern the nation may leave the euro region. King said the currency bloc is facing a prolonged period of “sluggish” growth that will affect the UK and that the Bank of England has the option to respond if needed.

Policy makers voted to halt expansion of stimulus last week after some officials stepped up their rhetoric on inflation, which has been above their goal for more than two years. King said on Wednesday that there’s a case both to expand bond purchases or to hold fewer securities and that the risks to inflation in two years are “broadly, evenly balanced.”

“The asset purchases we made between October and last month will continue to stimulate the economy for some time to come,” King said. “The fact we’ve not continued the programme at this stage doesn’t mean to say the effect doesn’t continue to pass through the economy — it does — and the option is still open to us also.”

Inflation will be about 1.6 per cent in two years after staying above the two per cent target for longer than it predicted in February, the central bank’s forecasts show. Officials also said that UK growth is likely to remain “subdued” in the near term, held back by the government’s fiscal squeeze, the pace of the global economy and tight credit conditions.

Gross-domestic-product growth is seen at about an annual 2.6 per cent in two years, according to the forecasts. The bank publishes its quarterly predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week. “The economy will recover much more slowly than the BoE predicts,” said Peter Dixon, an economist at Commerzbank AG in London. “By underestimating both the extent of deleveraging and the slowdown in potential growth, the BOE continues to run the risk of overstating the economy’s capacity to rebound.”