Britain is slumping into a deeper recession than earlier thought and will not grow until 2010, prompting the Bank of England to cut interest rates closer to zero next month and boost money supply, a Reuters poll of 57 economists showed.
Forty-six economists said the BoE would wield the axe one more time when it meets in March, according to the poll, published on Wednesday after the BoE released minutes from its February meeting. Of the 46, 39 economists forecast a 50 basis point cut, three said 75 basis points, two said the BoE would chop rates to zero and two said it would opt for just 25 basis points.
Median forecasts see the BoE's Bank Rate at 0.5 percent from March and holding there for at least a year. The central bank has already cut four percentage points off rates since November and at 1.0 percent they are already at the lowest in the bank's 315-year history.
A poll taken February 13-18 found economists expect the UK economy to contract 2.9 percent this year - much deeper than the 2.2 percent forecast last month. The growth rate will be just 0.6 percent in 2010, down from January's 0.8 percent forecast.
Minutes from the central bank's February meeting showed eight of the nine members of Monetary Policy Committee voted for a 50 basis point cut while arch-dove David Blanchflower backed a 100 basis point cut. "The overall tone of the minutes was clearly dovish and we think that the BoE will likely deliver another 50 basis point rate cut in March and then stop, while immediately starting to implement quantitative easing," said Chiara Corsa at UniCredit.
The BoE said it had voted unanimously to seek government approval to buy gilts and other securities to boost the money supply and Governor Mervyn King said he had met Finance Minister Alistair Darling to ask permission to start the programme.
A Reuters poll last week gave a median 80 percent probability the BoE would print money, known as quantitative easing, effectively raising the monetary base to support the economy. The central bank launched a scheme on Friday to buy short-term corporate debt in the first stage of a British drive to breathe life into moribund credit markets and stave off the worst effects of recession.
The UK economy contracted 1.5 percent in the last quarter of 2008, the deepest quarterly contraction since 1980. That marked the first official recession in the UK since the 1990s. The forecasts are a long way from the what now seems heady 3.0 percent growth seen in 2007 and the 0.7 percent growth expected for 2008, but forecasts were wide, ranging between a 1.3 percent and 3.6 percent contraction for this year.
This is the 13th consecutive month the 2009 forecast has been downgraded as economists grow more pessimistic and will raise expectations for further action from the Bank of England. The economy was not seen growing again until the first quarter of 2010 - and even then, at a mere 0.1 percent.
That is a quarter later than in last month's survey. "It is too early to say with any confidence when the recession will end, but at present we expect this to extend at least until early 2010," said John Hawksworth, head of macroeconomics at PricewaterhouseCoopers. BoE Deputy Governor Charles Bean was more upbeat on Monday when he said the recovery could start as soon as later this year but gave a grim forecast for the immediate economic outlook.
"A sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year," he said in a speech to the National Farmers' Union. However the worst may be behind the country with economists saying the last quarter of 2008 saw the biggest contraction. British inflation fell less than expected in January to 3.0 percent from December's 3.1 percent and compared to forecasts for 2.7 percent. Economists predict it will slide to 0.9 percent this year and move up to 1.6 percent in 2010, well below the BoE's two percent target.
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