* Bank of England leaves door open for more bond buys
* Governor King sees limits to what BoE can achieve
* Rise in jobless benefit claims adds to bad news on economy
* King sees independence intact despite government payments
By David Milliken and Olesya Dmitracova
LONDON, Nov 14 Britain faces years of meagre
economic growth coupled with rising prices, the Bank of England
warned on Wednesday, adding that its ability to numb the pain
was nearing its limit.
Governor Mervyn King left the door open for yet another cash
injection of bond buying as he presented the central bank's
downbeat outlook. He said the economy may shrink again at the
end of this year, just one quarter after it exited recession.
But, he said, monetary policy could only go so far in
helping the economy adjust to the new post-financial crisis
world of debt reduction and weak growth.
King's comments came as Britain's hitherto resilient labour
market showed signs of weakness, with the biggest rise in over a
year in the number of people claiming jobless benefits.
The outlook makes dire reading for the Conservative-led
government only weeks before finance minister George Osborne is
to give his half-yearly budget update.
He may be forced choose between missing his debt reduction
goal or adding more spending cuts and tax rises to his austerity
"We face the rather unappealing combination of a subdued
recovery with inflation remaining above target for a while,"
King said in the news conference to present the BoE's quarterly
Moreover, King warned that better times were still a long
"If (the) unfavourable world environment persists -- and
there is little sign of any change to the underlying problems in
the euro area -- it may be unreasonable to expect anything other
than a slow and protracted recovery," he said.
The opposition Labour Party said the central bank's outlook
was proof that the government's policies had failed.
But junior finance minister David Gauke defended the
austerity measures, saying the international environment was to
blame for the country's "long and challenging" recovery.
Britain has not fully recovered the output lost during the
2008-2009 slump, which left most Britons worse off as high
inflation and tax hikes ate away meagre wage increases.
The Inflation Report showed the BoE sees growth well below
its long-run average over the next three years, failing to
exceed 2 percent even in 2015.
At the same time, inflation was likely to be above its 2
percent target over the next 18 months, the report showed,
posing a barrier to further policy stimulus.
The outlook for inflation was the main reason why the
policymakers decided to stop the quantitative-easing purchases
of gilts last week, King said, rejecting suggestions that the
policymakers had lost trust in this tool's ability to boost
But King reiterated his view that there were limits to what
monetary policy could achieve. "What is limiting our ability to
do more is not on the monetary side, it is on the real side that
the economy has to adjust to a new equilibrium," he said.
Currency and bond markets focused on different parts of his
message. Gilts fell as investors cut expectations of near-term
bond buying, while sterling dipped on the gloomy outlook and
King's displeasure at its gain against the euro since last year.
"The outlook is pretty DIRE - Disappointing Inflation and
Rotten Expansion," said IHS Global Insight economist Howard
Archer in a note.
"This is in marked contrast to the NICE decade that Sir
Mervyn often used to refer to before the 2008/9 recession --
Non-Inflationary Consistent Expansion," he said, adding that 50
billion pound more in quantitative easing remained likely.
King also batted away criticism of the decision to transfer
back to the government the interest the central bank had
received on the bonds it bought as part of its stimulus
programme, which had raised questions about the Bank's
The government's decision did not undermine the role of the
rate-setting MPC or hurt independence, he said.
"It doesn't in any way effect our ability to set monetary
conditions or control the total amount of asset purchases or
sales or the timing of them," he said.
He also rejected the notion that the move was a step towards
ultimately monetising the government's huge debt pile.
"Parliament can always decide to do what it wants.
Parliament is supreme. But the Monetary Policy Committee
certainly won't do that and the Chancellor re-affirmed that the
MPC is in total control of asset purchases and asset sales," he