Bank of England’s Dale Says U.K.’s Economic Recovery is ‘Set to Continue’

Bank of England Chief Economist Spencer Dale said the U.K. recovery is likely to be sustained and investors expect global interest rates to increase faster than they forecast late last year.

“The recovery in the U.K. looks set to continue,” Dale wrote in the foreword to the bank’s quarterly bulletin released today in London. “Markets expected the pace of policy tightening, both in the U.K. and abroad, to be faster than at the time of the previous bulletin.

The bulletin covers the quarter through Feb. 25 and doesn’t take into account the potential impact of the earthquake and tsunami in Japan on the global economy.

Bank of England Governor Mervyn King has warned that the U.K. recovery will be “choppy,” and policy makers left the benchmark interest rate on hold at a record low of 0.5 percent this month. With inflation at twice the central bank’s target, officials have split on whether to raise the key rate to tame price pressures or focus on boosting growth.

On the outlook, Dale said investors remained “uncertain” about how the euro area may resolve its fiscal problems, while the political turmoil in North Africa and the Middle East also increased “uncertainty.” Still, he noted U.K. bank funding conditions have continued to improve.

‘Funding Challenge’: “U.K. banks made a solid start to 2011, having broadly met their funding requirements in 2010, but a significant funding challenge nonetheless remains,” according to the report.

British lenders issued a combined 31 billion pounds ($50 billion) of debt in January and February, up from a monthly average of 13 billion pounds in 2010. Since the end of November, they also repaid 19 billion pounds borrowed through the central bank’s 185 billion-pound Special Liquidity Scheme, bringing the total repaid to 94 billion pounds.

Above-target inflation prompted some investors to bring forward bets on the timing of the next interest-rate increase, the report said.

“Contacts noted that there had been uncertainty about what weaker-than-expected activity data, combined with stronger- than-expected inflation data, meant for the timing and degree of monetary-policy tightening,” the report said. In addition, “recent civil and political unrest in North Africa and the Middle East could lead to increased volatility in some exchange rates.”

The central bank said in an article in the report that the weakness of money growth in recent years is due to the impact of the recession and banks repairing balance sheets. These two factors “have been offset by the positive impact” of the Bank of England’s asset purchases, it said.

It also said the “unusually sharp slowdown” in bank lending partly reflects the “the role of the financial crisis in instigating and propagating the recession.”