Bank likely to cut growth forecasts

Published: Wednesday 12th November 2014 by The News Editor

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The Bank of England is expected to cut forecasts for growth and inflation when it publishes its latest outlook for the UK economy today.

Its quarterly inflation report is likely to cement the view that interest rates will remain on hold at 0.5% until well into 2015, after the general election in the spring.

Earlier this year a hike had been expected as soon as this month, but stagnating wages and low inflation, added to the effect of weakness in the eurozone, have persuaded the Bank to stay its hand.

Last month Threadneedle Street’s chief economist Andy Haldane broadly signalled that darkening economic prospects meant rates were unlikely to rise until the middle of next year.

The Bank’s most recent forecasts for growth domestic product (GDP), which see the UK growing by 3.5% this year and 3% in 2015, are already more optimistic than other predictions.

Official figures for the third quarter of 2014 showed growth of 3% compared to the same period of 2013, a slowdown on earlier this year.

Survey data for October suggested a further easing off in the recovery, showing the dominant services sector – representing more than three-quarters of output – seeing its slowest growth since May last year.

This week the CBI’s latest economic outlook maintained its GDP forecast at 3% for this year but it has cut expectations for 2015 from 2.7% to 2.5%.

Director-general John Cridland cited the “choppier” backdrop of sluggish growth in Europe together with heightened tensions in Ukraine and the Middle East, and slowing growth in China.

The prospect of interest rate rises has been further eased by the picture on inflation, which is at a five-year low of 1.2%.

Tumbling oil prices and a supermarket price war have prompted some speculation that it could fall below 1% by the end of the year, which would force the Bank’s governor Mark Carney to write a letter of explanation to the Chancellor.

While low inflation eases the strain on households, policy makers would be concerned were it to fall too much. Ultra-low inflation in the eurozone has provoked emergency stimulus measures to guard against the threat of a damaging deflationary spiral.

Struggling wage growth has also weighed against the prospects of an interest rate hike – with policy makers saying they want to see signs of real terms improvement before interest rates go up.

Pay increases have been lagging behind inflation for six years with latest figures showing a rate of 0.7%. Latest labour market data, published at the same time as the inflation report, will show whether there has been any improvement.

Interest rates have been held at 0.5% for more than five years after they were slashed in 2009 to help nurse the recession-hit economy back to health.

Mr Carney has said the recovery means the time for a hike is coming closer though his apparent changes of tone over when any rise will be have led to him being likened to an “unreliable boyfriend”.

Two members of the rate-setting Monetary Policy Committee (MPC) have dissented from the majority view of the nine-member body by voting for a hike at the last three meetings.

They argue that the Bank ought to “look through” the current low inflation picture to the medium-term path for the cost of living.

Scotiabank economist Alan Clarke said policy makers would want to start returning rates to a more normal level when appropriate so the potential “ammunition” of a rate cut would be available to fight a downturn in future.

He added: “Secondly, there is a strong argument that excessively accommodative monetary policy is what caused the recession and financial crisis that we are emerging from now.

“To persist with an emergency level of interest rates when the emergency has ended threatens to sow the seeds of the next crisis.”

Published: Wednesday 12th November 2014 by The News Editor

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