BOE Will Raise Benchmark Interest Rate to 0.75% in August, BCC Forecasts

The British Chambers of Commerce pushed back its forecast for when the Bank of England will raise the key interest rate after cutting its growth outlook.

The central bank will raise the rate to 0.75 percent in August from 0.5 percent, BCC Chief Economist David Kern said in an e-mailed statement. The London-based lobby group said in March that the bank would increase the benchmark in May. A separate report showed U.K. house prices fell this month.

The Bank of England’s Monetary Policy Committee is holding off raising interest rates to support the economic recovery, even after inflation accelerated to the more than double its 2 percent target. The BCC sees gross domestic product rising 1.3 percent this year and 2.2 percent in 2012. It previously forecast growth of 1.4 percent and 2.3 percent respectively.

“Although we would prefer to see interest rates held until the fourth quarter, we believe British businesses will be able to absorb small increases,” Kern said in the statement. “But the MPC must act with great caution and must not be too aggressive in its tightening.”

The group sees the Bank of England increasing its key rate to 1 percent this year and 2.75 percent by the end of 2012.

Growth will be slower this year after GDP rose less than forecast in the first quarter, while a higher inflation rate and a faster pace of rate increases will curtail expansion in 2012, the BCC said. It sees growth of 0.3 percent in the current and third quarters and forecasts an acceleration to 0.6 percent at the end of the year.

House Prices

A report from Hometrack Ltd. today showed U.K. house prices fell 0.1 percent in May after demand dropped for the first time in three months. Demand as measured by prospective buyers registering with realtors declined 0.5 percent as “weaker” consumer confidence and two consecutive four-day weekends at the end of last month curtailed activity.

“With concern over household finances and the wider economic outlook, demand for housing is likely to continue to post further modest declines,” Richard Donnell, research director at London-based Hometrack, said in an e-mailed report. “This will result in small single-digit price falls over the coming months and is consistent with our forecast that house prices will end the year down by around 1 percent.”

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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