E&Y’s ITEM Club to Cut U.K. Forecast, Say BOE QE Not Enough

Ernst & Young LLP’s ITEM Club will cut its U.K. growth forecast and say the Bank of England should lower its key interest rate as its expansion of stimulus this month is unlikely to be enough to aid the economy.

Gross domestic product will increase 0.9 percent in 2011 and 1.5 percent in 2012, compared with July projections of 1.4 percent and 2.2 percent respectively, the research group will say in a quarterly report to be issued in London tomorrow, according to an e-mailed statement.

As the euro-area debt crisis roiled financial markets, the Bank of England increased its bond-purchase program to 275 billion pounds ($433 billion) from 200 billion pounds. If European leaders fail to resolve the region’s crisis, larger doses of so-called quantitative easing will be insufficient and the government may need to provide additional support such as tax cuts to boost growth, ITEM Club will say.

“With the U.K. recovery grinding to a halt, new measures are now needed to help stimulate growth,” Peter Spencer, chief economic adviser to the ITEM Club, will say.

As well as raising the ceiling of its asset-purchase plan, the Bank of England also held its benchmark interest rate at a record low of 0.5 percent on Oct. 6.

A cut in the key rate “would provide a boost to borrowers and potentially help to stimulate consumer spending during the difficult months ahead,” Spencer will say.

ITEM Club will say its central forecast assumes that the Bank of England will expand its quantitative easing program further and not raise interest rates until November 2012.

U.K. GDP grew just 0.1 percent in the second quarter and data on Oct. 12 showed unemployment rose to 2.57 million in the three months through August, the most since 1994. While economic growth probably accelerated to 0.4 percent in the third quarter, business surveys indicate there will be “a soft patch around the turn of the year,” ITEM Club will say.

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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