Bank set to slash UK growth forecasts

Bank report will raise concerns over the strength of the UK economy as it enters the age of austerity Bank of England governor Mervyn King is expected to slash growth forecasts for the UK in a further sign the recovery is under strain. King, who will present the Bank’s quarterly inflation report at 10.30am, is also expected to say inflation will spike later this year before easing in 2012. The report should bring some relief to millions of homeowners as it is likely to reinforce dwindling expectations of an imminent interest rate hike. But lower growth will once again raise concerns over the strength of the UK economy as it enters the age of austerity, and questions will be raised over the severity of chancellor George Osborne’s fiscal squeeze. Economic growth forecasts have been progressively downgraded since the start of the year as more gloomy data emerges. The Bank predicted growth of around 2% for 2011 in its February report and City analysts expect it to revise estimates to around 1.5%. The Bank estimated growth of 3% for 2012, a figure some economists also expect to be cut. Recent figures revealed gross domestic product (GDP) grew at a tepid 0.5% in the first three months of 2011 , which, following a shock 0.5% decline in the final quarter of 2010, meant the economy had been flat for six months. Furthermore, inflation unexpectedly dropped in March to 4%, which while still double the government target, eased pressure on the Bank to raise interest rates, which have been at an historic low of 0.5% since March 2009. The rate of inflation for April is yet to be released. The Bank is expected to reiterate its belief that inflation will drop back towards the target in 2012, but analysts said the short-term estimate could be lifted. Howard Archer, chief UK and European economist at IHS Global Insight, said the flurry of recent disappointing data and surveys was likely to have heightened the MPC’s concerns over the economy. He said: “The MPC’s decision to keep interest rates down at 0.5% at its May meeting clearly reflected current serious concerns and uncertainties over the state of the economy and its ability to withstand the fiscal squeeze that increasingly kicked in from early April.” Commodity prices – such as oil and metal – slumped last week on fears over the strength of the global recovery. The Bank has frequently cited temporary global price hikes, which are beyond its control, as being behind the surge in home inflation so last week’s drop may well be welcomed. But analysts warned it is too early to say that the UK is coming out of the inflation woods. Vicky Redwood, senior UK economist at Capital Economics, said the Bank was likely to revise its near-term forecasts for inflation this year up from around 4.5% to 5%. The weak growth and eased pressure on inflation has led economists to push back expectations of an interest rate hike to August or November. Brian Hilliard, economist at Societe Generale, said King was likely to maintain his “dovish” line – that is keeping monetary policy loose. “The outstanding feature since the last inflation report has been the continuing uncertainty about the pace of the recovery,” Hilliard said. “King will feel vindicated in his dogged maintenance of the line that rate increases are not yet appropriate.” Economic growth (GDP) Bank of England Inflation Economics Mervyn King Interest rates guardian.co.uk

Posted by on May 11, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.