Bank of England forced to cut UK growth forecast yet again

05/08/2011 23:00

The Telegraph

The Bank of England will downgrade Britain's economic growth forecast this week, confirming that the recovery is stalling as the Government's austerity measures take their toll.

The central bank is expected to follow the consensus by revising down its figures in its quarterly Inflation Report on Wednesday. It will be the second quarter running that the Bank has lowered its outlook, having already cut its projections in February.

A downgrade is likely to be accompanied by a slight rise in its inflation forecast for the immediate future, analysts said. Combined, the outlook for growth and inflation is likely to point to the Bank leaving rates on hold at 0.5pc until the end of the year – in line with the most recent City projections.

In February, the Bank cut its growth forecast from the 3.27pc predicted in November to 2.6pc. Economists said it "doesn't have much choice" but to downgrade growth further, though it is likely to remain above the consensus of 1.5pc.

"Given that the Bank was expecting growth of 0.8pc for the first quarter and we got 0.5pc, it doesn't have much choice but to downgrade growth," said Hetal Mehta, of Daiwa Capital Markets. "You would expect the profile to shift down somewhat."

Vicky Pryce, of FTI Consulting, said: "They will downgrade their forecast for growth, especially after the first-quarter figures."

Kevin Daly, at Goldman Sachs, also confirmed: "For this year I imagine they will downgrade their growth forecast."

This year's growth has been progressively downgraded by analysts as more data emerge. In January, the consensus was for 2.1pc and the Office for Budget Responsibility predicted 1.8pc in March. A slowdown in growth in manufacturing and services last week further dented hopes for the recovery.

"This will be a pretty bad year," Ms Pryce said. "First of all the recovery hasn't really taken hold and we're feeling the impact of cuts. There will be a second year of declines in real incomes."

She added that the Bank may upgrade its short-term inflation outlook to reflect rising cost pressures but the figure will come down in "later years".

Mr Daly said that he believed that over the two-year forecast horizon, the inflation outlook could be lower than in February – and closer to target – as "wages growth has been weaker than expected".

Mervyn King, the Governor, is likely to say that the £110bn austerity programme is slowing the recovery. However, he remains adamant that the economy needs to be rebalanced away from public spending and towards exports and manufacturing.

For the time being, he warned last week, interest rates need to remain low. "The economic consequences of high-level indebtedness now would become more severe if rates were to rise," he said. "It is the main reason why interest rates are so low."

The Bank voted to leave rates on hold at 0.5pc last week and markets do not expect any move before December at the earliest. The Inflation Report is expected to confirm market expectations.


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