Bank of England cuts forecasts, dims rate hike prospects

AP News
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Posted: May 13, 2015 7:11 AM
Bank of England cuts forecasts, dims rate hike prospects

LONDON (AP) — The Bank of England on Wednesday downgraded its forecasts for British economic growth, suggesting it will not be in a rush to raise interest rates this year.

It cut its estimate for growth this year to 2.5 percent from 2.9 percent and for 2016 to 2.6 percent from 2.9 percent.

Governor Mark Carney sounded a pessimistic note on labor productivity, saying it remains weak and is expected to stay below past average growth rates.

The bank also downgraded expectations for wage growth this year from 3.5 percent to 2.5 percent. Continued slow growth in wages was a "key risk," Carney said.

However, he said consumer confidence was the strongest in over a decade, with household spending boosted by lower food and energy prices. Unemployment in Britain dropped to a seven-year low of 1.83 million, figures showed Wednesday.

The bank said inflation is expected to increase to its 2 percent target within two years, as falls in oil and food prices ease.

Vicky Redwood, an analyst with Capital Economics, says the forecasts suggest that the Bank of England expects to start raising interest rates in the middle of next year. They are unlikely to raise them quickly from their record low of 0.5 percent, she said.

"We still expect rates to end 2016 at just 1 percent," Redwood wrote in a note to investors.

Britain's economy is one of the fastest-growing among developed nations but the Bank of England is anxious to stoke the recovery and push up inflation.

Prime Minister David Cameron, who has just won a second term in office, has pledged to continue budget cuts designed to bolster growth.