August 10, 2005

Bank of England issues inflation warning

by brian_turner

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The Bank of England’s quarterly inflation report warns that economic growth will remain subdued in the short term. The major risk to economic growth is a slowdown in consumer spending, but growth is expected to be stronger in two years time. Terrorist attacks are reported to have had little effect on the overall growth of the UK economy.

The Bank warned that inflation could exceed its target of 2%. It plans to reduce its 2005 growth forecast from 2.5% to approximately 2%. Growth of more than 3% is forecast for 2007, which could 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 reduced interest rates from 4.75% to 4.5%. Economists are divided over whether a further reduction will be forthcoming.

Alan Castle, of Lehman Brothers said the report was “more hawkish” than expected, but said “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”.

Most analysts had expected rates to fall to approximately 4% by the end of the year, but it is now thought there will be just one more 0.25% rate cut.

The Bank said that while the housing market seemed to have cooled of its own accord, rising oil prices were causing concern.

Although inflation is expected to exceed 2% in two years time if market forecasts of interest rates are realised, the Bank expects the rate to eventually dip as oil prices fall in the future.

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