Bank dampens rate hopes despite recession warning

THE PROSPECT of another cut in UK interest rates before Christmas faded yesterday after the Bank of England's quarterly economic assessment proved less gloomy than feared. In its regular inflation report, the Bank cut its forecasts for both economic growth and inflation, and said there was now a one-in-four chance of recession next year.

Mervyn King, deputy governor of the Bank, warned that unemployment was likely to rise over the next 12 months.

City analysts said yesterday's jobless figures - which revealed increases in both key measures of numbers out of work for the first time in almost six years - could mark the beginning of a sustained period of rising unemployment.

Despite the warnings on unemployment and growth, the overall tone of the Bank's inflation report was less gloomy than the City had expected, prompting a rise in the value of leading company shares. The FTSE 100 closed up 44.5 points at 5,476.8. Traders said a string of better-than- expected company results helped sentiment.

The pound spiked upwards against the Deutschmark following the release of the report, but fell back to close down over a pfennig at DM2.787.

Analysts were braced for a downbeat report from the Bank and deep cuts to growth forecasts following last week's larger-than-expected 0.5-point cut in UK interest rates. To the City's surprise, however, the Bank produced similar forecasts to those released by the Treasury in the pre-Budget report.

Several analysts said that both the Bank and Treasury were painting too rosy a picture of economic prospects. Mark Wall of Deutsche Bank said: "We believe the Bank is too optimistic on the outlook for the economy and in order to avert a full-blown recession, we expect the Bank to reduce interest rates to 5 per cent by the end of the year."

The Bank's central projection is that growth in gross domestic product (GDP) will slow to around 1 per cent next year, before rebounding in 2000.

At the press conference following the release of the report, Mr King stressed that although the Bank's Monetary Policy Committee did not think recession was the most likely outcome, risks to activity "remained on the downside".

The Bank also cut its forecasts for inflation. In August RPIX - the underlying rate of inflation targeted by the Bank - was forecast to peak at around 3 per cent early next year before falling towards target by summer 2000.

Now the Bank believes inflation will peak at around 2.8 per cent next year - primarily because of one-off effects associated with the introduction of the minimum wage - and will quickly return to target.

By the middle of 2000, inflation could fall below target, the Bank said, prompting analysts to speculate that interest rates would come down again, although possibly not until next year. Michael Saunders at Salomon Smith Barney/Citibank said: "Given the MPC's forecasts, a December cut now seems unlikely unless new global shocks materialise. January or February seem more likely bets."

Mr King said uncertainty about the reliability of average earnings data meant there was "considerable uncertainty" about the Bank's inflation forecasts. Publication of the average earnings index - scheduled for yesterday along with the unemployment figures - has been suspended until an inquiry into the series has been completed.

The unemployment data showed that the claimant count rose by 6,800 in October, while the ILO jobless measure - a broader measure of unemployment - rose by 3,000 in the three months to September.

Hamish McRae, page 22

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Operations Manager

£30000 - £38000 per annum: Recruitment Genius: They are a financial services c...

Guru Careers: Stockbroker

£Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Day In a Page

Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk
Nepal earthquake: One man's desperate escape from Everest base camp after the disaster

Escape from Everest base camp

Nick Talbot was sitting in his tent when the tsunami of snow and rock hit. He was lucky to live, unlike his climbing partner just feet away...
Adopting high fibre diet could dramatically cut risk of bowel cancer, says study

What happened when 20 Americans swapped diets with 20 Africans?

Innovative study in the US produces remarkable results
Blake Lively and 'The Age of Adaline': Gossip Girl comes
of age

Gossip girl comes of age

Blake Lively is best known for playing an affluent teenager. Her role as a woman who is trapped forever at 29 is a greater challenge
Goat cuisine: Kid meat is coming to Ocado

Goat cuisine

It's loved by chefs, ethical, low in fat and delicious. So, will kid meat give lamb a run for its money?
14 best coat hooks

Hang on: 14 best coat hooks

Set the tone for the rest of your house with a stylish and functional coat rack in the hallway
Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?