The British Chambers of Commerce cut its U.K. economic growth outlook and said the Bank of England will keep interest rates on hold until the second half of next year.
The central bank will leave the rate at a record-low 0.5 percent until August 2012, when it will raise it by a quarter point, BCC Chief Economist David Kern said in an e-mailed statement today. The London-based lobby group said in May that the bank would increase the benchmark this year.
The Bank of England’s Monetary Policy Committee is holding off raising interest rates as a faltering economic recovery outweighs the risk of inflation that is more than double its target. The BCC sees gross domestic product rising 1.1 percent this year and 2.1 percent in 2012, cutting a June projection for 1.3 percent and 2.2 percent respectively.
“Future growth, both globally and in the U.K., will be constrained by the consequences of the credit bubble and banking crisis that caused the recession,” Kern said. “Debt levels are still too high, and the process of deleveraging will be painful and will inevitably result in a prolonged period of relatively low economic growth.”
The BCC sees the central bank increasing its benchmark rate to 1 percent in the fourth quarter of next year and to 2.25 percent by the end of 2013.
If signs of weakness in the economy persist, the bank will consider increasing its 200-billion pound ($326 billion) emergency bond-purchase plan by 50 billion pounds, the BCC said. Regulators should also mull temporarily relaxing bank capital requirements to “counter acute risk aversion” and promote the availability of credit to businesses, it said.
U.K. economic growth slowed to 0.2 percent in the second quarter and the central bank cut its growth projections last month. Its forecasts show GDP rising about 1.5 percent this year and 2.2 percent next year.
The deteriorating outlook prompted Bank of England policy maker Martin Weale and Chief Economist Spencer Dale to abandon a push for a quarter-point rate increase at last month’s MPC meeting. Some officials also debated whether there was a need to expand the bond program.
Other central banks are also discussing additional stimulus. Minutes of the Federal Reserve’s Aug. 9 meeting published this week showed some officials favored a “more substantial move” beyond the pledge it adopted to hold rates at record lows for the next two years.
The BCC sees the U.K. economy expanding 0.3 percent in the current quarter, 0.5 percent in the last three months of the year and then 0.6 percent per quarter in 2012.
“The outlook is tough, but the renewed gloom about the economy is unjustified, and partly reflects earlier excessive optimism,” Kern said. “Britain has the potential to recover.”