- Sees BOE increasing key rate to 0.75% in 3Q vs 2Q previously
- Says manufacturing to contract this year, recover in 2016
A worsening global outlook will damp U.K. growth and persuade the Bank of England to keep its key rate at a record low until the third quarter, according to the British Chambers of Commerce.
The business lobby group cut its forecast for this year’s expansion to 2.4 percent from 2.6 percent, and lowered its predictions for 2016 and 2017 to 2.5 percent from 2.7 percent. International uncertainties pose “serious potential risks” for the economy, it said in a statement in London on Wednesday. The BCC also pushed back its forecast for the Bank of England to raise its key rate by 25 basis points, saying it’ll now happen in the third quarter rather than the second.
“Premature interest-rate increases are unnecessary and too risky, at a time when the recovery is still fragile and global uncertainties are mounting,” said BCC Chief Economist David Kern. These “provide strong arguments for the MPC to delay even further” than the third quarter, he said.
While Britain’s economy expanded 0.5 percent in the third quarter this year, bolstered by domestic demand that’s being fueled by record-low inflation and a pickup in wages, the BCC questioned whether the balance of growth is sustainable.
“We cannot rely so heavily on consumer spending to fuel our economy, especially when driven by increased borrowing,” said John Longworth, director general of the BCC. “The U.K. still needs to see a fundamental shift in its economic model if we are to remain relevant and prosperous in a changing world economy.”
Manufacturing will shrink 0.2 percent this year and then grow 0.7 percent in 2016, the BCC forecast. Services, the largest part of the economy, will expand 2.7 percent this year and 2.9 percent next year.
The central bank will increase its key rate to 0.75 percent in the third quarter, and keep raising it in quarter-point increments until it reaches 1.75 percent in the fourth quarter of 2017, the BCC predicted. The bank has held the benchmark at 0.5 percent since March 2009.
BOE officials will vote 8-1 to keep the key rate unchanged at this month’s policy decision, according to a Bloomberg survey of economists. The bank will publish its decision at noon on Thursday, alongside minutes of the policy meeting and a statement. These will outline how policy makers’ thinking has changed since November, when they weighed a resilient domestic economy against the weaker global outlook and signaled low rates are needed to ward off risks.