BOE Will Keep 0.5% Rate Until Second Quarter as Cuts Bite, BCC Says
Aug. 30 (Bloomberg) -- David Kern, chief economist of the British Chambers of Commerce, talks about the London-based group's forecast for Bank of England interest rates to remain on hold at least until the second quarter of 2011. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
The Bank of England will leave interest rates on hold until the second quarter of 2011 as government spending cuts increase the risk of a double-dip recession, the British Chambers of Commerce said.
Economic expansion may average 2 percent in the next five years, lower than the 3 percent average in the 15 years through 2007, the London-based group said in a statement today. It raised its growth forecasts for this year and next to 1.7 percent and 2.2 percent from a June projection of 1.3 percent and 2 percent.
The U.K. economy grew the most since 2001 in the second quarter, as central bank officials split on whether there is a bigger threat from inflation or a slowdown in the recovery. The BCC said policy makers must be mindful of the threat to longer- term growth from government austerity measures to reduce the budget deficit.
“The Bank of England cannot ignore the risk that inflationary expectations may worsen,” BCC Chief Economist David Kern said in the statement. “However, threats of a setback to growth remain more serious than risks of a surge in inflation. Given the balance of risks facing the economy, we urge the Monetary Policy Committee to keep interest rates at 0.5 percent until the second quarter.”
The BCC said inflation will remain above the Bank of England’s 2 percent target through 2011 before easing to 1.7 percent in 2012. It expects the central bank to increase the benchmark interest rate to 1.75 percent by the end of next year.
The BCC also said the budget gap may narrow faster than the government anticipates, citing a “surprising buoyancy” in tax revenue. It sees the shortfall declining to 9.7 percent of gross domestic product in the current fiscal year and 5.1 percent in the year ended March 2013. The deficit was 11 percent in the last fiscal year.
“The scale of fiscal retrenchment, and the decision to cut the deficit at an accelerated pace, will inevitably increase dangers of a double-dip recession,” Kern said. “The new policy faces obstacles, and will only succeed if it is accompanied by a coherent growth strategy.”
To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net
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