[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Wednesday, 10 August 2005, 12:14 GMT 13:14 UK
Bank of England warns of slowdown
Bank of England
The Bank is forecasting slower short-term growth
Economic growth will remain subdued in the short term, the Bank of England said in its quarterly inflation report.

The Bank said the major risk to economic growth was a slowdown in consumer spending. But it said growth would be stronger in two years time.

The Bank also warned that inflation could move above its target of 2%.

It plans to cut its 2005 growth forecast from 2.5% to around 2%. But it expects growth of more than 3% in 2007, which might rule out further rate cuts.

The official UK government projection is for growth of 3% in each of the next three years.

On Thursday, the Bank cut interest rates to 4.5% from 4.75%, and economists are split over whether further rate cuts are on the cards.

There was an impact on the day (of the bombings) but it seems to have been shortlived
Mervyn King, governor, Bank of England
The Bank also made it clear that the terrorist attack had little effect on the overall growth of the UK economy.

Hawkish report

After listening to Bank governor Mervyn King, most analysts said they were lowering their expectations of how far, if at all, the Bank would continue to cut rates.

"All in all, today's report was a bit more hawkish than we expected, but we are sticking with our call for another rate cut in November on the assumption that near-term growth once again disappoints the Bank's estimates," said Alan Castle of Lehman Brothers.

We are somewhat more pessimistic than the Bank of England...and therefore still forecast another interest rate cut late this year
Howard Archer, Global Insight

Most analysts had forecast that rates would fall to around 4% by the end of the year. But now the consensus appears to be that there would be, at best, just one other 0.25% rate cut.

The Bank appears to believe that the housing market has cooled of its own accord, and the fears that it previously had over a housing market bubble have been lessened.

However, it pointed out that rising oil prices were now causing concern.

Capricious consumers

High Street
Slower consumer spending contributed to the recent rate cut

It predicted that although inflation would move above 2% in two years time if market forecasts of interest rates are realised, the rate would eventually dip as oil prices fell in the future.

"The Oil price is one of the major pieces of news since our last report," said Mr King.

"It is not simply a repeat of the 1970s, that was a supply side shock. The latest increases we have seen are driven by demand, and we have been going into these increases with a reasonably buoyant world economy."

Mr King said the markets expected oil prices to fall.

He also said another possible factor in the Bank's deliberations - the impact of the 7 July bombings in London - had been brief.

"There was an impact on the day but it seems to have been shortlived," he said.

Rates uncertain

The Bank's Monetary Policy Committee has been given the job of keeping UK inflation within the 2% target over a two-year planning horizon.

The projection that inflation will move above 2% in two years is based on an assumption that base rates fall to around 4% by early 2006.

The Bank used to base its inflation predictions solely on the premise that interest rates would not change in the future.

However it now also predicts an inflation level for the future based on what the market expects to happen to rates - and in this case the market expects rates to fall.

But Mr King drew comparisons with the England cricket team's surprise win when talking about the unpredictable nature of setting future rates.

He said: "As we saw at Edgbaston on Sunday, nothing is that certain.

"So, as ever, the MPC will play each ball on its merits and not decide in advance where interest rates will go next."

Howard Archer, chief UK economist, Global Insight, said "we are somewhat more pessimistic than the Bank of England about growth prospects, and therefore still forecast another interest rate cut late this year.

"Furthermore, we are currently maintaining our belief that interest rates will fall to a low of 4% in the first half of next year."

Business leaders give their views on the economy

The BBC is not responsible for the content of external internet sites


Americas Africa Europe Middle East South Asia Asia Pacific