UK economic growth 'to pick up'

Will a weaker pound help industry?

The recent fall in the pound will lead to faster economic growth later this year but house price rises will grind to a halt, the Bank of England has said.

In its quarterly inflation report, the Bank said the cheaper pound would stimulate the economy as UK goods become more competitive abroad.

There was also a warning that house price growth could slow more quickly than expected and grind to a complete halt within a year.

Inflation is forecast to rise slightly from its current level of 3% in the short term before falling back below its target level of 2.5% early next year.

No 'dramatic difference'

The Bank has raised its central growth forecast for next year to about 2.5% by the end of 2004.

This is higher than its previous prediction but still below the 3-3.5% projection made by Chancellor Gordon Brown in last month's Budget.

Annual house price inflation (is set to slow) to a halt over the next year or so

Bank of England inflation report

However, the Bank's governor-designate Mervyn King played down the difference between the two predictions at a press conference.

He said while there was a gap between the forecasts he did not think the difference was "enormous".

The Bank said inflation would be pushed higher in the short term by the recent rise in council tax bills, but that weaker house and petrol prices would pull inflation down later in the year.

It noted that the weakening of the pound could push prices higher, but Mr King said the Bank remained unruffled by recent moves.

"I don't think the committee is especially worried about the speed at which sterling has fallen," he said.

Rate cut unlikely

Last week the Bank kept rates on hold at 3.75% and the report said the level "remained appropriate" for the 2.5% inflation target.

Analysts said the relaxed tone coming from the Bank made the prospect of an early interest rate cut unlikely.

"Overall, the conclusion must be that this is a more dovish report than the news flow over the last three months would have suggested," said Adam Cole, an economist at Bank Credit Agricole Indosuez.

"In particular, the Bank seems to be much less sensitive to the exchange rate than we thought."

House price pause

The Bank said the outlook for business had been complicated by the outbreak of the war in Iraq, but said recent surveys suggested a modest recovery was under way.

It said the risks to its growth and inflation forecasts were "broadly balanced".

Risks included the uncertainty of how strongly the global economy will recover and the prospects for exports.

The Bank also said the slowdown in consumer spending could pose a risk.

It noted that household spending had slowed much faster than expected in the early part of the year, and said house prices were set for a pause.

"The Committee judges that the prospective deceleration in house prices is likely to be rather sharper than assumed in February, with annual house price inflation slowing to a halt over the next year or so," the report said.