The pace of U.K. second-quarter economic growth was a “blip” and it isn’t time for the Bank of England to begin removing stimulus, the National Institute of Economic and Social Research said.
The U.K. economy expanded 1.1 percent in the three months through June, the fastest pace in four years, data last week showed. That complicates the dilemma policy makers face as they mull whether the economy faces a greater threat from inflation or needs more stimulus as the government implements the deepest budget squeeze since World War II.
“I don’t think that growth rate will be sustained,” Niesr economist Simon Kirby told reporters in London. “Far from that, I think the growth rate will fall back somewhat quite sharply.”
Bank of England official Andrew Sentance this month repeated his call for the central bank to begin raising interest rates, citing “resilient” inflation. While the Monetary Policy Committee voted to leave its benchmark rate on hold at its July 8 meeting, members “considered arguments in favour of a modest easing,” minutes of the decision showed.
“I wouldn’t expect any change whatsoever over the next few months,” Kirby said in a Bloomberg Television interview. “They’ll want to see how strong gross domestic product grows in the third quarter of this year.”
Niesr sees economic growth of 0.1 percent in the current quarter and 0.3 percent in the fourth quarter. While the institute raised its forecast for 2010 economic growth to 1.3 percent from 1 percent in April in a quarterly report published in London today, it lowered the 2011 projection to 1.7 percent from 2 percent.
“I still think the next move by the Bank of England will be to tighten policy, but that will be in probably the second quarter of next year at the earliest,” Kirby said. “But clearly there are risks around the forecast.”
“We would advise the MPC to make no change at the next few meetings as they assess whether this robust growth persists,” Niesr said, referring to the second-quarter expansion.
Kirby sees inflation remaining above the Bank of England’s 2 percent target until 2012 because of the government’s planned sales-tax increase. He previously forecast it would drop below that level next year. Inflation was at 3.2 percent in June.
While the economy may expand about 2.5 percent a year from 2013, there are “downside” risks in the short term, Kirby said. “We shouldn’t automatically rule out the chance of a quarter or two of it actually contracting in the U.K. over the next couple of years.”