Bank of England Lowers 2007 Economic Growth Forecast
By: Administrative Account | Source: Bloomberg
May 10, 2006 6:09AM EST

May 10 (Bloomberg) -- The Bank of England lowered its forecast for economic growth next year, leading investors to pare bets on higher interest rates. Growth may accelerate to about 3 percent in the fourth quarter before slowing to about 2.75 percent by the final three months of 2007, the central bank estimated in its quarterly inflation report, released in London today. It was previously predicting growth of as much as 3.25 percent in 2007. The rate of consumer-price inflation will rise above 2 percent this year before moderating to target by the end of 2007, it said. Europe's second-largest economy grew 0.6 percent in the first quarter, matching the fastest pace in a year, as accelerating world economic growth boosted industrial production. Rising energy prices are constraining consumer spending, which accounts for two- thirds of the economy, while boosting inflation expectations. ``The risks to output growth are broadly balanced, but the risks are many and varied,'' Bank of England Governor Mervyn King said in a press conference in London, ``In particular, there are still risks on the downside associated with the impact of strong energy and import price inflation and real disposable incomes and consumer spending.'' The forecasts are modeled on the Bank of England benchmark rate following the path implied by market interest rates. Investors are betting the Bank of England will raise the repurchase rate a quarter-point to 4.75 percent this year and to 5 percent by the middle of 2007. Interest-Rate Futures The yield on the three-month Libor futures contract due December 2006 fell four basis points, to 4.96 percent after the report was released. The contract maturing in June 2007 fell three basis points, to 5.15 percent. The contract settles to the three- month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank's target for the past decade. A basis point is 0.01 percentage point. In February, when investors were expecting interest rates to remain unchanged this year, the bank forecast growth of around 2.7 percent in 2006, with the rate reaching around 3 percent in the final three months of the year. The economy would expand 3-3.25 percent in 2007, it said. Inflation, which was 1.8 percent in March, was forecast to remain around the 2 percent target over the two-year forecast horizon. Today, the bank today also changed the risks surrounding its forecasts. The risks to growth and inflation are ``broadly balanced,'' it said. In February, the bank said the risks to growth were ``to the downside'' and ``broadly balanced'' for inflation. Economic Slowdown The bank reduced its benchmark rate a quarter point to 4.5 percent in August to spur an economy that grew 1.8 percent last year, the least since 1992. Since then consumption and industry have recovered and house prices have gained. The bank forecast ``steady growth in consumer spending, a modest recovery in investment and a small boost from net trade,'' will support growth going forward, offsetting ``slower growth from public expenditure.'' Still, the growth profile is ``slightly weaker than in February,'' the bank said. The bank cut its growth forecast for 2007 because of concerns higher energy and import prices may curb consumer spending and government spending will increase less rapidly than it thought. A gauge of consumer confidence from the Nationwide Building Society, the country's third biggest mortgage lender, fell to a six-month low in April. Retail sales fell 0.7 percent in the three months through March. Oil-Price Record Crude oil for May delivery reached a record of $75.35 a barrel on the New York Mercantile Exchange on April 21. Gas prices reached a record 255 pence a therm on March 13, according to London-based broker Spectron Group Plc. The housing market and higher equity prices will support consumption, the bank said. House prices, which account for 60 percent of U.K. wealth, rose 2 percent in April from March, the most in two years, HBOS Plc said May 4. Retail sales gained 0.7 percent in March from February, the biggest gain in four months, the government said April 24. The FTSE All-Share Index has gained 6 percent to the highest in almost six years since the last inflation report. Accelerating growth at home and abroad is also helping spur a revival in industry. Industrial production grew more than services for the first time in almost seven years in the first quarter. Factory gate prices rose for a fourth straight month in April as manufacturers passed on soaring raw material costs. Global Growth The bank said today that net trade will contribute to growth as ``robust global growth will stimulate exports.'' The International Monetary Fund last month raised its 2006 growth forecast for the world economy to 4.9 percent from 4.3 percent. Stephen Nickell, who has been the sole advocate for an interest-rate reduction since December, leaves the Bank of England's rate-setting committee at the end of this month, increasing the likelihood of votes for higher borrowing costs in coming months. Stronger growth and accelerating inflation have led to higher borrowing costs in the U.S. and Europe. The Federal Reserve on March 28 increased its key rate for a 15th time since June 2004, to 4.75 percent, raising U.S. borrowing costs above those in the U.K. for the first time since December 2000. The European Central Bank on March 2 raised its refinancing rate for the second time in three months, to 2.5 percent.

To contact the reporter on this story: Laura Humble in London at lhumble@bloomberg.net Last Updated: May 10, 2006 06:06 EDT