Bank will be forced to cut rates to avert recession, says leading analyst

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The Independent Online

Rises in taxes and a slowdown in public spending will wipe at least a full percentage point off UK economic growth, forcing the Bank of England to cut interest rates to avert recession, a leading independent analyst said today.

Rises in taxes and a slowdown in public spending will wipe at least a full percentage point off UK economic growth, forcing the Bank of England to cut interest rates to avert recession, a leading independent analyst said today.

The warning came as the OECD, the rich nations' think-tank, delivered a gloomy outlook for the world economy and urged the European Central Bank to cut rates "significantly" to boost demand in the eurozone. A sharper slowdown in consumer spending was the main risk to the UK economy, the OECD added.

In a new piece of research, Capital Economics, the consultancy set up by the City economist Roger Bootle, said fiscal policy - tax and public spending - was about to become a drag on the UK economy. It said the rapid growth in public spending that had added between 0.5 and 1.0 per cent to GDP growth over recent years was coming to an end. It warned that Government plans already pointed to a slowdown in public spending that would knock 0.5 per cent off GDP.

On top of that, it said taxes would have to rise over the coming two years to ease the deficits in the public finances. "Borrowing has reached the sort of level where there has to be fiscal consolidation," Jonathan Loynes, its chief UK economist, said.

"The Government's heavy borrowing has been a major factor behind the economy's strength - now it's payback time."

He said this coincided with a slowdown in consumer spending that had also supported the economy through the global recession at the start of the decade. He said the Bank would cut rates below the 50-year low of 3.5 per cent they reached in 2003, although there was a danger that inflationary pressures would prevent it cutting rates far enough.

"If inflationary pressures were to bite and prevent them from responding we would have to think more seriously about a real slump in the economy," he said.

The Treasury dismissed the report, saying the UK was enjoying the longest period of sustained growth in its industrial history.

The OECD forecast GDP growth of 2.4 per cent this year and in 2006, substantially below Gordon Brown's prediction of 3.0 to 3.5 per cent in 2005.

"Despite the recent pick-up in inflation, weakening growth prospects suggest that monetary tightening will not be required to maintain inflation close to target," the OECD said.

But Richard Lambert, a member of the Bank's Monetary Policy Committee, indicated yesterday the MPC had not ruled out a rise in rates. "The central projections in our latest inflation report look remarkably benign... but that may turn out to be too rosy a view," he said last night.

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