Bank of England raises questions about growth

Published: WEDNESDAY, MAY 10, 2006

LONDON: The Bank of England lowered its 2007 economic growth forecast but lifted its inflation predictions Wednesday, raising questions about the timing of a widely anticipated rise in interest rates.

In its quarterly inflation report, the bank said that growth could accelerate to about 3 percent in the first quarter before slowing to about 2.75 percent by the final three months of 2007. The bank was previously predicting growth of as much as 3.25 percent in 2007.

The bank added that the rate of consumer-price inflation would rise above the bank's target of 2 percent this year because of higher energy and import costs before returning to the threshold by the end of 2007.

"The risks to output growth are broadly balanced, but the risks are many and varied," said the Bank of England governor, Mervyn King. "In particular, there are still risks on the downside associated with the impact of strong energy and import price inflation on real disposable incomes and consumer spending."

Economists had widely predicted a rise in interest rates in the coming months, potentially as early as August, but the report Wednesday was more dovish than expected.

The bank's Monetary Policy Committee has left its main rate unchanged at 4.5 percent since it cut it from 4.75 percent in August 2005.

"This morning the Monetary Policy Committee admitted for the first time that the next move in interest rates in the U.K. is more likely to be up than down," John Butler, a British economist at HSBC, said.

Richard McGuire, fixed-income strategist at RBC Capital Markets, said that the softer growth profile assuaged expectations that any move in rates is imminent.

McGuire said that the risks remained tilted toward higher rates, but that the bank was likely to remain on the sidelines for "a good while yet."

Policy makers might not be able to agree on where interest rates should go.

Stephen Nickell, who leaves the bank's policy committee this month and has called for rate cuts at least five months running, is probably one of the members who expects inflation to undershoot the target.

Some other committee members expect inflation to exceed 2 percent if rates rise only slightly. Minutes of the policy meeting last week will not be published until next Wednesday.

The British economy grew 1.8 percent in 2005, its weakest performance since 1992, on the back of slower consumer spending. Inflation was just above the bank's target at 2.1 percent.

Separately Wednesday, the Office for National Statistics reported that Britain's trade gap narrowed sharply in March as exports of goods outstripped goods imports.

The statistics office said the deficit on trade in goods and services in March was £3.8 billion, or $7.1 billion, compared with a revised £5.4 billion in February.

King said that a further narrowing in the deficit would be necessary.

"It isn't likely to be sustainable that we can run a trade deficit of 4 percent of GDP," he said. "There is likely to be some adjustment." $@

Home > Business