Bank slashes forecast for growth

THE BANK of England has cut its forecast for growth this year and warned there is a one in four chance of recession in the first half of 1999.

Its Inflation Report yesterday heightened expectations of further cuts in interest rates. Many City economists predict the cost of loans will fall to 5 per cent within a month or two.

Mervyn King, Deputy Governor, said the Monetary Policy Committee did not have a plan now to reduce rates in future. "We will take it month by month," he said.

But the report made it clear that some MPC members thought inflation would be lower than the forecast published yesterday. It emphasised the dangers posed by weaker prospects for the world economy and the fact that earnings growth had turned out far lower than the committee had expected.

"We are not in a pause," Mr King added, asked whether interest rates were now on hold.

The Bank's forecast of annual growth between 0.5 and 1 per cent this year, if interest rates remain at their current level of 5.5 per cent, appeared to be at odds with the Chancellor's prediction, in November's Pre-Budget Report, of 1 to 1.5 per cent growth.

The Bank predicted inflation was likely to stay around the 2.5 per cent target for the next two years. The Deputy Governor said: "For the first time in a generation, people expect low inflation."

The Treasury said the Inflation Report was "broadly in line" with the Government's view that inflation would stay low and growth would pick up during the course of the year.

The Prime Minister's official spokesman said: "I am not aware of any plans for Gordon Brown [the Chancellor] to further revise his Budget forecast."

But many outside forecasters expect the Treasury to revise down its expectation for growth in the light of news on the economy since November.

Steven Bell, chief UK economist at Deutsche Bank, said: "People will laugh if the Treasury publishes an unchanged growth forecast in the Budget."

Mr King said yesterday that it was clear the Bank was prepared to move rates as necessary to keep inflation at around 2.5 per cent. "Inflation can be too low as well as too high," he said.

The report said prospects for the world economy had worsened, as highlighted by the crisis in Brazil. "This will require a policy response in the industrialised world," Mr King said, echoing comments made separately by Eddie George, Governor of the Bank of England.

The Inflation Report also emphasised the danger that a sharp fall in share prices could hit growth. So too could stock reductions by business as the economy slows, following signs that weak demand has led to an unwanted build-up in inventories.

However, Mr King said the risk of the year-on-year growth rate turing negative remained only one in four. After two flat quarters, GDP growth would revive in the second half of 1999.

Mr Bell predicted unemployment would rise this spring but added that this would still be the mildest economic downturn for a generation, with inflation staying low. "It is a fantastic outcome," he said.

Some City experts are more optimistic about growth, seeing a marked pick- up later in the year. Neil Parker of the Royal Bank of Scotland said: "There will be another one or two interest rate cuts soon, but we will get the corrective medicine in the first part of next year."