Hopes of rate cut fade after Bank raises growth forecast

Hopes that interest rates could soon be cut, lowering mortgage costs for millions of Britons, were dampened by the Bank of England yesterday.

The Bank increased its forecast for the growth of the UK economy this year, leading experts to conclude that no rate cut is imminent.

The Governor, Mervyn King, said he expects GDP to rise at 2.7 per cent this year, up from the 2.5 per cent estimated in November. City traders bought sterling and sold government bonds on the news.

Economists have fearedthat consumer spending will fall because of a weak jobs market and high levels of debt. But the Bank signalled it expects consumers will continue to shop, thanks to improvements in the stock market and in property prices.

Yesterday's Inflation Report highlightedareas of concern, such as rising fuel prices, but overall it painted a positive picture of the economy. Howard Archer, at Global Insight, said the report "does little to encourage the view that the Bank could trim rates in the immediate future".

Interest rates have been held steady at 4.5 per cent since August. Inflation is tipped to remain at about 2 per cent for the next two years - in line with the Bank's target.

However, Mr King acknowledged there were "substantial risks" to the economy. He said: "Before any of you are tempted to get carried away with the flat profile for the central projection for inflation, let me remind you that the chance that inflation will remain so close to the target throughout the forecast period is negligible."

Other good news came from figures showing unemployment claims fell while salaries increased. Although the jobless rate rose to 5.1 per cent, the highest for three years, the number of claims for unemployment benefit dipped by 2,000 to 904,200.

The employment and welfare reform minister, Margaret Hodge, said: "The underlying trends seem to me to be pretty robust."

Average pay is rising at 3.6 per cent a year, according to the latest numbers, up from a previously estimated 3.4 per cent. Higher bonuses for workers in the City seem to be behind the increase, though wage inflation remains considerably less than the 4.5 per cent level at which the Bank becomes concerned.

Some economists had predicted an interest rate cut in March. After yesterday's numbers were released, many backed away from this view, while insisting the next move was likely to be down rather than up. James Knightly, an economist at ING, said: "With inflation firmly on a downward trend we continue to look for 50 basis points of rate cuts from the Bank over the next six months."

The Bank admitted it was surprised by the scale of recent gas price increases - UK wholesale gas prices quadrupled during November. It was also open about its inability to predict what will happen to oil prices, which have doubled in the past two years.

The report said: "The future supply of oil is impossible to gauge with any precision."

One effect of the rising fuel costs, the Bank said, is that some businesses are delaying plans for expansion. Meanwhile, business investment remains low, although it is expected to pick up slightly in the next two years as exports improve.