Bank of England Forecasts UK Output Growth to Slow This Year Before Recovering.
The Bank of England said Wednesday that further cuts to U.K. interest rates would drive inflation slightly above the official target, but it forecast inflation pressures to ease in the longer term.
In its quarterly inflation report, the bank said its outlook was more pessimistic than in its previous review in November, with the state of the U.S. economy a major worry. However, it said it looked for a gradual slowdown and not a sharp retrenchment.
"Near-term growth prospects for the United States have worsened since the November report, with GDP growth falling sharply and the weakness in the housing market spreading to other parts of the economy," the bank said. "The relaxation in macroeconomic policy and the further weakening in the dollar over the past six months should mitigate the slowdown. But the scale and pace of any recovery are highly uncertain, and the risks are to the downside."
However, the bank noted that "economic conditions in the euro area, the United Kingdom's largest trading partner, remain consistent with steady, if subdued, growth. And prospects remain robust in commodity-rich countries, China and other emerging markets."
The bank's governor, Mervyn King, said it faced a challenge of balancing risks in setting interest rates. "A sharper slowing in activity would threaten to pull inflation below the target," he said. On the other hand, the bank projected that consumer price inflation was likely to be above the official 2 percent target through much of the year.
The bank's report looked at the impact of cutting its base rate from the current 5.25 percent to 4.75 percent in the second quarter, and then to 4.5 percent later in the year. Based on that assumption, the bank forecast that growth would fall back "markedly" in the near term "as tighter credit conditions induce higher household saving and weaker investment growth, and higher energy and import prices bear down on real income growth."
"Output growth picks up later in the forecast period, as the effects of lower interest rates and sterling work through, and credit conditions ease somewhat," the report said. Noting that the report was less optimistic than three months ago, the bank said that "reflects the weaker outlook for world activity, real incomes and credit conditions."
The unemployment rate in the United Kingdom in the last quarter of 2007 fell to 5.2 percent, down from 5.4 percent in the previous quarter, the government said Wednesday. Average earnings, including bonuses, rose 3.7 percent in the fourth quarter compared with a year earlier, the Office for National Statistics said.
The Bank of England said Wednesday that further cuts to U.K. interest rates would drive inflation slightly above the official target, but it forecast inflation pressures to ease in the longer term.
In its quarterly inflation report, the bank said its outlook was more pessimistic than in its previous review in November, with the state of the U.S. economy a major worry. However, it said it looked for a gradual slowdown and not a sharp retrenchment.
"Near-term growth prospects for the United States have worsened since the November report, with GDP growth falling sharply and the weakness in the housing market spreading to other parts of the economy," the bank said. "The relaxation in macroeconomic policy and the further weakening in the dollar over the past six months should mitigate the slowdown. But the scale and pace of any recovery are highly uncertain, and the risks are to the downside."
However, the bank noted that "economic conditions in the euro area, the United Kingdom's largest trading partner, remain consistent with steady, if subdued, growth. And prospects remain robust in commodity-rich countries, China and other emerging markets."
The bank's governor, Mervyn King, said it faced a challenge of balancing risks in setting interest rates. "A sharper slowing in activity would threaten to pull inflation below the target," he said. On the other hand, the bank projected that consumer price inflation was likely to be above the official 2 percent target through much of the year.
The bank's report looked at the impact of cutting its base rate from the current 5.25 percent to 4.75 percent in the second quarter, and then to 4.5 percent later in the year. Based on that assumption, the bank forecast that growth would fall back "markedly" in the near term "as tighter credit conditions induce higher household saving and weaker investment growth, and higher energy and import prices bear down on real income growth."
"Output growth picks up later in the forecast period, as the effects of lower interest rates and sterling work through, and credit conditions ease somewhat," the report said. Noting that the report was less optimistic than three months ago, the bank said that "reflects the weaker outlook for world activity, real incomes and credit conditions."
The unemployment rate in the United Kingdom in the last quarter of 2007 fell to 5.2 percent, down from 5.4 percent in the previous quarter, the government said Wednesday. Average earnings, including bonuses, rose 3.7 percent in the fourth quarter compared with a year earlier, the Office for National Statistics said.
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