Bank Trims Its Economic Growth Forecast
Wednesday May 11, 2:33 pm ET
By Jane Wardell, AP Business Writer
Bank of England Trims Economic Growth Forecast As Consumers Stay Away From Shops
LONDON (AP) -- The Bank of England trimmed its growth forecasts for the British economy Wednesday as consumers continued to stay away from the shops, prompting speculation that interest rates will stay at current levels or be cut in the second half of the year.
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The central bank also slightly revised down its two-year forecast for growth in consumer prices, predicting that inflation would accelerate beyond the bank's 2 percent target in the near term but would then fall back and stay close to the target over the next two years.
Bank of England governor Mervyn King said consumer spending, which hit low levels at the start of 2005 after consistent growth, is the key uncertainty affecting the bank's forecasts in its quarterly inflation report.
"In February, the Monetary Policy Committee argued that the main downside risk was to the near-term strength of consumption," King said. "Since then, that risk appears to have crystallized. Weakness in household spending has become more marked and has persisted into this year."
The report by the bank's interest rate-setting group forecast gross domestic product to be slightly lower than the 2.7 percent forecast at the time of its February report.
"The new central projection is a little weaker than in February, especially towards the beginning of the forecast period, although close to the historical average," King said. The historical average is between 2.5 percent and 2.7 percent.
King said the slowdown in consumer spending was largely because of the slower growth in disposable incomes and house prices, but added those factors did not entirely account for the drop in retail sales.
"Other factors may be at work," he said. "It is impossible to isolate the exact causes."
Economists were divided on whether the report indicated that rates would remain on hold at 4.75 percent or whether cuts were likely later in the year to stimulate the economy.
"This morning's inflation report sent out a neutral message, which unsurprisingly is a shift away from the hawkish tone in February," said John Butler, U.K. economist at HSBC Markets. "The MPC seem prepared to act in either direction depending on how the data unfolds, but the expectation among the committee is that rates will remain at present levels."
Jonathan Loynes at Capital Economics said he expects rates to fall to around 4 percent by the end of this year, and further to around 3.5 percent next year.
The committee left rates unchanged at its last meeting on Monday amid signs of slowing economic growth. It was the ninth consecutive month the committee had held its base rate steady, supporting economists' expectations that subdued consumer spending would outweigh an unexpected rise in inflation.
King said that oil prices remain a risk to the inflation outlook, but said there have not yet been "obvious signs" that higher gasoline prices are leading to higher wage demands or "second-round effects."
"The ... central view is for household spending growth to recover, but to remain below the average of recent years," said King.
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