There is a growing probability that British interest rates will be cut this year, according to a Reuters poll conducted after the Bank of England raised its near-term inflation forecasts and slashed growth expectations.
Economists forecast a 40 percent chance of a cut by year end, significantly higher than the 30 percent prediction in a poll just two weeks ago but a long way from the almost guaranteed rate cut that is priced in by the market. Still, median forecasts in the poll of 63 economists predict the Monetary Policy Committee will leave rates unchanged at 5.0 percent until the end of the year.
The central bank is then expected to cut rates by 25 basis points in each of the first three quarters in 2009, to 4.25 percent. This is unchanged from the last poll. "The next move will be lower in our view and the risk is that this cut comes in earlier than the May (2009 date) that we have in our forecast," said Amit Kara, UK economist at UBS. "The MPC could cut in November if surveys suggest that economic activity is shrinking." Some economists have already brought forward their expectations for a rate cut, with 52 of the 63 polled seeing rates at 4.75 percent or below by end-March, compared with 60 of 74 in last month's poll.
The BoE's quarterly inflation forecasts, released on Wednesday but available to MPC members when they voted to leave rates unchanged last week, predicted inflation would spike close to 5 percent before dropping back to target in two years.
"The current period of above-target inflation, although very marked, will be temporary and inflation will return to the 2 percent target," BoE Governor Mervyn King told a news conference. Inflation is running at more than double the central bank's two percent target - data released on Tuesday showed it reached 4.4 percent in July, much higher than expected - at a time when the economy is rapidly slowing.
The Inflation Report saw the bank cut its growth forecasts for the UK economy, seeing GDP "broadly flat over the next year or so" with risks to the downside. It also raised the possibility of a recession.
"I think with output broadly flat, it's bound to be the case that there is a possibility of a quarter or two of negative growth," King said. This compares with a 1.5 percent average growth forecast for 2008 and 1.0 percent for 2009 in a recent Reuters poll.
Economies around the globe have been hit by a year-old credit crunch that started with mortgage problems in the United States, spread to virtually every financial market, and is now hitting the world economy. Official data released earlier on Wednesday showed the number of Britons claiming jobless benefit rose in July by the largest amount since 1992, indicating the weaker economy is having a knock-on effect on the labour market, although also keeping a lid in wage inflation.
Britain's housing market, a bedrock of consumer wealth that tripled in value over the past decade, has been struggling and data released by the Halifax mortgage lender showed house prices fell for the sixth month in a row in July.