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WRAPUP 2-BoE gloomy on outlook, little scope for rate cuts
Reuters: [2008-05-14 18:08:00]
(Updates with Reuters interest rate poll)
By Sumeet Desai and David Clarke
LONDON, May 14 (Reuters) - The British economy could shrink for a quarter or two and inflation may near 4 percent this year, the Bank of England said on Wednesday in its bleakest forecasts since the Labour government took power in 1997.
Economists said the expected spike in inflation even further above the central bank's 2 percent target meant that interest rates won't come down quickly, even with news on the housing market downturn getting nastier by the day.
Less than a fifth of economists polled by Reuters now expect a cut in June. Two-thirds did just two weeks ago. Most expect the central bank will wait until later this year before cutting rates, prolonging the pain for the economy.
"The Monetary Policy Committee is facing its most difficult challenge yet," said Bank of England Governor Mervyn King. "We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot, and should not try to, prevent that adjustment."
"Inflation will return to the target and growth will evenutually recover to a sustainable rate. But we will need to be patient."
That spells trouble for Prime Minister Gordon Brown. He is banking on a quick recovery to win back support for his Labour Party after it was pushed into a humiliating third place in local elections this month by voters worried about the rising cost of living and falling house prices.
They may soon start worrying about their jobs as the credit crunch tightens its grip. The number of people claiming unemployment benefit rose for a third month running in April in a sign that Britain's buoyant jobs market may be on the turn.
POLITICAL DYNAMITE
King said further house price falls were also likely, adding to sharply rising concerns over the housing market in the last few weeks. Prices have started falling as mortgage lenders hit by the credit squeeze have made it harder for people to take out new home loans.
Another Reuters poll on Wednesday showed analysts expect a 5 percent house price fall this year and another 5 percent in 2009, but many commentators are even more pessimistic.
Bank of England policymaker David Blanchflower has said he would not be surprised by a decline of more than 30 percent.
That could be political dynamite in a country where two thirds own their homes. The government has been lobbying mortgage lenders to pass on the BoE's three official rate cuts to their customers in an attempt to revive the market.
But interest rate cuts may be a long way off. "The probability of a June cut has been on life support since the CPI data yesterday and the inflation report has now switched the machine off," said Alan Clarke, economist at BNP Paribas.
The BoE report shows inflation could hit 3.7 percent this year and still be clearly above its 2 percent target if interest rates come down by half a percentage point over the next year, as many analysts had previously expected.
King said he expected to have to write to the government several times on how he plans to bring prices back under control -- as required by the central bank's remit if inflation deviates from target by more than a percentage point.
April's figures already showed the CPI rate almost there, at 3.0 percent.
Economic growth was expected to slow to around 1 percent at the end of this year before picking up to around 2.3 percent in two years -- still below the long-term trend rate.
"It is quite possible that at some point we may get an odd quarter or two of negative growth, but recession is not the central projection at all," said King.
For text of King's comments, click on [ID:nL14710946] For Reuters interest rate poll story, click on [ID:nL14799522] For poll data, click on <POLL3> For Factbox on rate expectations, click on [ID:nL14408261] For Reuters housing market poll, click on [ID:nL14576071]
((additional reporting by Christina Fincher, Paul Majendie, Matt Falloon and Jonathan Cable; editing by David Clarke))
((Reuters messaging: sumeet.desai.reuters.com@reuters.net; +4420 7542 7708))
Keywords: BRITAIN ECONOMY
POLL-FACTBOX-Shifts in BoE interest rate expectations
Reuters: [2008-05-14 16:51:00]
May 14 (Reuters) - The Bank of England is expected to hold rates in June on
fears of soaring inflation, a Reuters poll showed. The poll, conducted after the
bank's quarterly inflation report, projected only a 20 percent chance of a cut
in June compared with a 70 percent chance seen in the May 1 survey.
Economists now expect a cut to come in the third quarter of this year while
keeping expectations for the year-end rate to be at 4.50 percent -- the same as
the last poll. Only two economists forecast a rate hike in 2009.
Following is a table on how economists' forecasts for the BoE's Bank Rate
have evolved over the last eight Reuters polls.
FORECASTS FOR END 2008
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Poll Date 14-May 01-May 10-Apr 03-Apr 20-Mar 28-Feb 13-Feb 31-Jan
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Median 4.50 4.50 4.50 4.50 4.50 4.50 4.75 4.75
Sample size 53 65 56 64 57 65 54 59
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Rate at 5.25 0 0 0 0 0 0 0 4
Rate at 5.00 8 3 3 4 11 12 8 11
Rate at 4.75 16 12 10 13 10 20 20 18
Rate at 4.50 24 21 20 30 26 25 22 20
Rate at 4.25 2 20 15 12 8 7 3 5
Rate at 4.00 3 9 8 5 2 1 1 1
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FOR DETAILS OF THE POLL, DOUBLE CLICK ON <POLL3>
FOR RELATED POLL STORY.... [BOE/INT]
FOR RESULTS IN PDF FORMAT.... [BOE/PDF]
(Table compiled in Bangalore by Sumanta Dey and Dinesh Mehta; Editing by Ruth
Pitchford)
((Reuters Messaging: chandra.ramarathnam.reuters.com@reuters.net;
+91 80 4135 5899))
Keywords: BOE RATES/POLL
POLL-Reuters BoE post-Inflation Report poll results
Reuters: [2008-05-14 16:51:00]
http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=urn:newsml:reuters.com:nRPOeG1d0
POLL-BoE to keep rates steady until Q3 as inflation soars
Reuters: [2008-05-14 16:46:00]
By Jonathan Cable
LONDON, May 14 (Reuters) - The Bank of England will hold off cutting rates from 5.0 percent until the third quarter as it battles soaring inflation, a Reuters poll of economists taken after the central bank published its quarterly review showed.
The poll of 53 economists found 27 of them predicting the bank would next cut rates between July and September, with 17 plumping for August.
Only 9 predicted a June rate cut, compared with 45 of 60 forecasting a cut by June in a poll published just two weeks ago.
The median probability of a cut next month has been slashed to 20 percent from the 70 percent predicted in the last poll, while the forecast for a cut by the end of the year was 80 percent, compared with 95 percent in the earlier poll.
Expectations for further cuts diminished when the Bank of England's quarterly inflation and growth forecasts, published on Wednesday, showed inflation nearing 4 percent this year, well above the 2 percent target.
"The message that comes out of the forecast is that rates are on hold for the foreseeable future," said George Dicks at RBS.
Bank of England Governor Mervyn King said policymakers face their toughest challenge since 1997 -- when the BoE became independent in setting rate policy -- as they try to balance rising prices against weaker economic growth.
The central bank report showed GDP growth slowing to around 1 percent at the end of 2008 and said there was an outside chance the economy could contract, with risks to the downside as the global credit crunch hampers any imminent recovery.
Britain's economy grew at its weakest rate in three years in the first quarter at only 0.4 percent, below the long-term trend, leading some economists to think the bank will cut rates soon.
"There is a case for that easing coming sooner rather than later given there are still downside risks to growth. They don't gain much by waiting and arguably it will be tougher to ease later in the year when headline inflation is even higher," said Daragh Maher at Calyon.
CARRY ON CUTTING?
The central bank cut rates by 25 basis points in April after making similar cuts in February and in December, which was the first cut in two years.
But British rates have not fallen nearly as fast as in the United States, where they have plummeted 3.25 percentage points since September as the Federal Reserve battles to prevent a prolonged recession in the world's biggest economy.
"Our impression is that the BoE is now inclined to have an even more gradual approach than seemed to be the case until one month ago," said Chiara Corsa at UniCredit, who changed her prediction from a June cut to August.
Median forecasts by 54 economists showed the Bank Rate at 5.0 percent at mid-year, falling to 4.75 percent by September and again to 4.5 percent by the end the year. Economists then predicted a drop to 4.25 percent in the second quarter of 2009.
The May 1 poll forecast rates at 4.75 percent by June and then at 4.5 percent by September before dropping again to 4.25 percent early next year.
Despite expectations for cuts the British housing market, a bedrock of consumer wealth which has tripled in value over the last decade, could see prices fall by 5 percent this year, with many economists believing they could tumble twice that. [GB/HOMES]
((FOR POLL DATA CLICK ON <POLL3>))
((FOR A FACTBOX ON INTEREST RATE EXPECTATIONS CLICK ON [ID:L14408261]))
(Polling by Bangalore Polling Unit and Nigel Davies in London; Editing by Ruth Pitchford) ((jonathan.cable@thomsonreuters.com; +44 20 7542 4688: Reuters messaging: rm://jonathan.cable.reuters.com@reuters.net))
Keywords: BOE RATES/POLL
REFILE-WRAPUP 1-BoE gloomy on outlook,little scope for rate cuts
Reuters: [2008-05-14 16:41:00]
(Refiles to correct to "not" from "nor" in fourth para)
By Sumeet Desai and David Clarke
LONDON, May 14 (Reuters) - The British economy could shrink for a quarter or two and inflation may near 4 percent this year, the Bank of England said on Wednesday, in its bleakest forecasts since the Labour government took power in 1997.
Economists said the spike in inflation above the central bank's 2 percent target, caused by soaring food and energy prices, meant interest rates couldn't fall too quickly, prolonging the pain for the economy.
This spells trouble for Prime Minister Gordon Brown. He is banking on a quick recovery after voters, fretting about the rising cost of living and falling house prices, pushed his Labour Party into third place in local elections this month.
Bank of England Governor Mervyn King said economic growth might grind to a halt, but probably not for long.
"It is quite possible that at some point we may get an odd quarter or two of negative growth, but recession is not the central projection at all," he told a news conference after the BoE published its quarterly economic forecasts.
More Britons may also soon start worrying about their jobs as the credit crunch tightens its grip. Figures on Wednesday showed the number of people claiming unemployment benefit rose for a third month running in April in a sign that Britain's buoyant jobs market is on the turn.
King made clear that BoE policymakers had no magic wand to restore the economy to health. "The Monetary Policy Committee is facing its most difficult challenge yet," he said. "We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot, and should not try to, prevent that adjustment."
LETTER-WRITING
King said further house price falls were also likely, though he added that no one could be sure what would happen in the end.
Concern over the housing market has risen sharply in the last few weeks. Prices have started falling as mortgage lenders, hit by the credit squeeze, have made it harder for people to take out new home loans.
A Reuters poll on Wednesday showed analysts on average expect a fall of 5 percent this year and another 5 percent next, but many commentators are much more pessimistic.
Briefing notes for housing minister Caroline Flint said prices could at best fall 5-10 percent this year. MPC member David Blanchflower has said he would not be surprised by a decline of more than 30 percent.
That could be political dynamite as two thirds of British households own their homes and the government has lobbied mortgage lenders to pass on the BoE's three official rate cuts to their customers in an attempt to revive the market.
Further interest rate cuts may be a long way off. "The probability of a June cut has been on life support since the CPI data yesterday, and the inflation report has now switched the machine off," said Alan Clarke, economist at BNP Paribas. "We now believe the next cut will be delivered in August, with a risk of (a move) later."
The BoE report shows inflation could hit 3.7 percent this year and still be clearly above the BoE's 2 percent target if interest rates come down by half a percentage point over the next year, as many analysts expect.
The risks were on the upside because of global energy prices and because the longer inflation was above the target, the more entrenched people's expectations of price rises become.
King said he expected to have to write to the government several times on how he plans to bring prices back under control -- as required by the central bank's remit if inflation deviates from target by more than a percentage point.
April's figures already showed the CPI rate almost there, at 3.0 percent.
Economic growth was expected to slow to around 1 percent at the end of this year before picking up to around 2.3 percent in two years -- still below the long-term trend rate.
((additional reporting by Christina Fincher, Paul Majendie and Matt Falloon; editing by David Stamp))
((Reuters messaging: sumeet.desai.reuters.com@reuters.net; +4420 7542 7708))
Keywords: BRITAIN ECONOMY
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