Bank of England Cuts 2009 Growth Forecast

The Bank of England cut its economic-growth forecast for next year and said it couldn't rule out one or two quarters of contraction, leading investors to expect a cut in interest rates before the end of 2008. In its quarterly Inflation Report, the central bank's rate-setting Monetary Policy Committee said the economy is likely to stagnate over the next 12 months as high energy and food prices eat into disposable incomes and credit conditions remain tight. It also predicted that the annual rate of inflation will fall sharply after a surge in the months ahead. Also recently, the Office for National Statistics said the number of people claiming unemployment benefits rose by 20,100 in July, the biggest gain since Dec. 1992. According to forecasts, the inflation rate will touch 5% this year but fall sharply from early 2009 to slightly below the central bank's 2% target in mid -2010. Growth will be "broadly flat" in the near term, the committee said, down from a prediction in May that annual growth would bottom-out around 1% in the 1st-Q of next year. Investors took the growth and inflation forecasts as a sign the door opened to cuts in the key bank rate. Deutsche Bank currently expects the central bank to cut its key rate to 4.5% in the 1st half of '09. The pound sterling tumbled as the report was released, plunging to a near 22-month low of $1.8640 from around $1.8992 just before. The central bank said that if its growth forecasts were to turn out to be wrong, it is most likely that the economy would grow more slowly. While warning of pain to come, King also stressed that the U.K. isn't suffering a repeat performance of the economic downturn of the late 1980s. During those years, interest and unemployment rates soared, making it impossible for many Britons to make mortgage interest payments. According to its forecasts, the committee expects economic growth to rebound quickly from the middle of next year, bringing it back to around its 2.75% trend rate in late 2010. Perhaps the biggest surprise from the report came from the inflation forecasts, which now show inflation slightly undershooting the 2.0% target two years from now.