The Bank of England said today that it faced “considerable uncertainties” in forecasting the outlook for the UK’s already-fragile economy.
In its quarterly inflation report, the Bank said that it remained possible that the world economic slowdown would deepen. It said: “The overall risks to growth continue to be on the downslide.”
Those risks led the Bank’s Monetary Policy Committee (MPC) to cut UK interest rates form 5.25% to 5% last week. Ahead of next week’s official publication of the minutes of last week’s MPC meeting, the Bank said: “Delaying any policy response risked deepening the downturn and pushing inflation below target.”
The underlying rate of inflation is currently just 0.2% below Chancellor Gordon Brown’s target of 2.5%, although the Bank suspects that this figure may have been artificially boosted by the impact of the foot-and-mouth outbreak. With interest rates at 5%, the Bank expects inflation to fall to around 2% early next year, before edging back up towards the 2.5% target.
However, the Bank warned: “Considerable uncertainties surround these projections. The possibility that the slowdown in the international economy may be deeper or more prolonged remains a downside risk.” It added that an increase in personal savings and further downsizing from firms could also impact on its forecasts.
Projections for GDP growth also show that the rate will be slightly below initial forecasts for the rest of the year at about 2%. The Bank said: “Growth in the UK has slowed below trend in the wake of the global slowdown, although domestic demand underpinned by strong private and public consumption has held up.”
The Bank added that the gulf in output between the manufacturing and service sectors was now at its widest since 1980. Mervyn King, the Bank’s deputy governor responsible for monetary policy, said: “The tale of two economies has intensified. Manufacturing is in recession; consumer spending is buoyant.” King added that last week’s decision to cut interest rates had not been an easy one to make.
King said: “It was unfortunate that we sprang a surprise, but the committee were faced with a choice – to surprise people last week by cutting rates or to surprise them today by publishing a forecast which indicated that a further cut was likely. It decided to take the simpler and more straightforward course of making a modest reduction in interest rates, to keep inflation on track to meet the inflation target looking some two years or so ahead.”
Ian Fletcher, chief economist at the British Chambers of Commerce, said: “Today’s report illustrates clearly that the greater risk to our economy is slowing world growth, rather than inflation. The Bank should have the scope to cut interest rates further in the months ahead and should aggressively use every opportunity.”
Simon Rubinsohn, chief economist at Gerrard’s stockbrokers, said that economic data over the next few weeks would be even more crucial. He said: “The trend in unemployment will be carefully watched for any signs that retail spending could soon lose some of its recent buoyancy. Our suspicion is that interest rates could be cut again as soon as October.”
EGi News 08/08/01
