The U.K. economy will grow less this year than previously forecast, pushing the Bank of England to keep its main interest rate at a record low until the first quarter of 2012, the Confederation of British Industry said.
Gross domestic product will rise 1.3 percent in 2011, compared with an estimate of 1.7 percent in May, Britain’s biggest employers’ group said in quarterly forecasts released in London today. The CBI’s growth prediction for 2012 is unchanged at 2.2 percent.
The British economy barely grew in the second quarter and data this week may show manufacturing and services expansion slowed in July. The Bank of England will keep its key rate at 0.5 percent on Aug. 4, according to all 55 economists in a Bloomberg News survey, even after inflation was more than double its 2 percent target in June.
“We will continue to make headway, but the rest of the year is going to be tougher than we previously thought,” CBI Director-General John Cridland told reporters in London on July 29. “Looking ahead to 2012, we still see scope for the economy to be on a somewhat firmer footing, but the overall picture is undoubtedly subdued.”
The group previously forecast that the central bank would begin raising its benchmark in the autumn. It sees the rate at 1.5 percent at the end of 2012.
“Given the subdued nature of the economy, we will continue to see only a very gradual normalization of monetary policy,” CBI Chief Economic Adviser Ian McCafferty said.
Cridland said the euro area sovereign-debt crisis, the U.S. political stalemate on raising the debt ceiling, and monetary- policy tightening in China have “triggered an erosion in confidence and a marked softening in activity.”
“Certainly, the mood amongst CBI members, as I meet them, has darkened significantly over recent weeks,” he said.
The U.K. economy grew 0.2 percent in the three months through June from the previous quarter, when it increased 0.5 percent. The CBI sees GDP rising 0.8 percent in the three months through September and increasing between 0.5 percent and 0.6 percent in each quarter through 2012.
An index of factory growth probably fell to 51 in July from 51.3 in June, while a gauge of services may have dropped to 53.2 from 53.9, according to Bloomberg surveys of economists. Markit Economics will publish the reports on Aug. 1 and Aug. 3.
Bank of England officials will also keep their bond- purchase program at 200 billion pounds ($328 billion) this week, according to a separate Bloomberg survey.
“I don’t think there is need at this stage for more quantitative easing,” McCafferty said. “I also believe that if the bank were to move toward QE at this stage, it would probably spook the markets.”
The CBI raised its inflation forecast, saying consumer- price gains will peak at “just over” 5 percent in September, compared with a previous estimate of “just under” 5 percent. Inflation will ease in 2012 and “will be approaching, although not quite reaching” the Bank of England’s 2 percent target by the end of the year.
A separate report by employment website Reed.co.uk today showed an index of U.K. demand for workers fell 3 points in July to 122. The gauge is based on listings on the website’s job board.
“While it’s clear the underlying economic recovery remains fragile and difficult, and confidence is in short supply, all the underpinning evidence says that there will be some bounce back over the autumn,” Cridland said. “On balance, we don’t believe that the recovery has stalled.”
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