Karamsar Rapor

FT

King warns of slowing growth
By Chris Giles and Scheherazade Daneshkhu
Published: November 14 2007 14:53 | Last updated: November 14 2007 14:53
Two interest rate cuts will be needed to stem an economic slowdown and prevent inflation falling too far, the Bank of England’s new economic forecasts indicated on Wednesday.

In the most gloomy UK Inflation Report for five years, the Bank said the global credit squeeze would hit growth hard. Mervyn King, the Bank’s governor added that the near term economic outlook was particularly tricky with “slowing growth and rising inflation”.

He made it clear that when the data proved the economy was cooling too fast, the Monetary Policy Committee would cut interest rates from the current 5.75 per cent rate. The Bank’s forecasts showed inflation on target in two years’ time only if UK interest rates were reduced a touch below 5.25 per cent by the start of 2009.

The pessimistic outlook for growth has come from the Monetary Policy Committee’s judgment that credit conditions will tighten for companies and households. More expensive borrowing would hit corporate investment, the property market, construction and encourage households to make a shift from borrowing to saving.

Michael Saunders of Citigroup estimated the Bank was forecasting growth of 2.3 per cent in 2008, down from its previous 2.7 per cent central estimate. The MPC also said it was concerned growth would be even slower.

Although the Bank thinks it highly unlikely that the UK’s annual growth rate will fall below zero in any quarter, Charlie Bean, the Bank’s chief economist, said the chances of a recession – defined by two consecutive quarters of falling output – was a more plausible scenario.

Mr King said the important question for the committee in coming months was whether “the slowing we expect to see, or we’re going to see, [is] bigger than the slowing that we have wanted to see”.

The strong implication from both the committee’s November decision to hold rates and the new economic forecasts is that the committee expects the economy to perform considerably worse than expected, but it is still too unsure of this expectation to cut rates. “There will be some difficult decisions in the months ahead,” said Mr King.

The money market reacted by firming its expectation of a rate cut by the spring. The yield on March short-sterling contracts fell by 0.08 percentage points, as investors digested the report’s new economic pessimism.

Though the credit crunch and the repricing of risk that would hit more risky borrowers was uppermost in Mr King’s mind, he also made it clear that he did not think all financial markets had become more careful about taking on dangerous bets.

He was particularly stuck by the lack of rising concerns about risk in equity markets, which are higher now than they were in August. “There must be some downside risks [to the world economy] from that and that’s one of the things which is factored into the projections”.

Mr King also said the tensions in global currency markets would continue as the huge trade imbalances began to unwind and the US dollar fell sharply against floating currencies but hardly at all against the Chinese renminbi and other currencies linked to the dollar.

“I came away from the IMF meetings in Washington recently more concerned about the implications of these tensions precisely because the unwinding of the imbalances is not just a hypothetical prospect out there, but is happening now and I think this is a major concern,” he said.

Asked whether the retail run on Northern Rock was something that had made him consider resignation, Mr King said, “no”.

Copyright The Financial Times Limited 2007