/www.bloomberg.com/ London, (Bloomberg) -- The Bank of England reduced its economic growth forecast, giving policy makers scope to cut interest rates again after last week trimming borrowing costs to the lowest in almost half a century.
The bank said the economy will grow about 2.5 percent this year, below the 3.1 percent it forecast in November. An increase in the rate of inflation, which the bank predicts will exceed its 2.5 percent target this year, will be ``temporary.''
``Growth seems to have faltered,'' said Deputy Governor Mervyn King, who succeeds Sir Edward George as governor in July. ``The world economy continues to recover slowly.''
Europe's second-largest economy expanded 1.7 percent last year, the least since 1992. The bank, which last week pared its benchmark rate to 3.75 percent, the lowest since 1955, said the risks of a war in Iraq and a faltering world economy will curb growth.
In the dozen nations sharing the euro, destination for more than half of British exports, gross domestic product may shrink this quarter, the European Union forecasts. Confidence among consumers, whose spending accounts for about two thirds of the U.K. economy, is waning and may decline further in the event of a protracted war in Iraq, the bank said.
``The growth forecast should be revised down further to the 2 percent mark,'' said Geoff Lunt, who helps manage $8.5 billion in bonds at Investec Asset Management in London. ``It's far more likely that the next move in rates is going to be down than up.''
`Justify Another Cut'
Futures trading indicates another rate reduction by the middle of the year. The rate on a sterling deposit maturing in June was 3.44 percent. The yield on the 6 3/4 percent U.K. government note maturing in 2004 fell 3 basis points to 3.32 percent. A basis point is 0.01 percentage point. The FTSE 100 stock index shed 0.9 percent to 3636.5 at 3:09 p.m. in London.
``They definitely have room to go again and we think they will,'' said George Buckley, an economist at Deutsche Bank AG, the only bank of 29 surveyed by Bloomberg News to correctly predict last week's move. ``They will still be able to justify another cut.''
Companies ranging from Corus Group Plc, Europe's third- largest steelmaker, to Lastminute.com Plc, which offers short- notice flights and vacations online, posted wider losses in their latest financial reports. Corus said it may fire a third of its U.K. workforce.
Inflation Tame
The Bank of England downplayed its decision to raise the inflation forecast, citing ``temporary influences'' including housing and oil costs that will ``unwind.''
Retail prices excluding mortgage interest payments -- the bank's main gauge of inflation -- will rise to around 3 percent this year, then ease to the 2.5 percent target by the end of the next year. That contrasts with November's prediction that inflation would average 2.4 percent in 2004.
``Inflation is reasonably contained,'' said Ian Stewart, chief European economist at Merrill Lynch & Co. which forecasts another quarter point reduction in interest rates. ``The bank has become more tolerant of greater upside risks on inflation in order to reduce the risk of a slowdown in consumption.''
Last week's cut was the first since November 2001 and followed half-point reductions by the European Central Bank and U.S. Federal Reserve in November. The ECB's benchmark rate is 2.75 percent. The Fed's is 1.25 percent.
The bank's decision to lower rates last week came as the ECB and Fed suggested monetary policy in their regions would remain unchanged until the situation in Iraq was resolved.
Impact of War
Fed Chairman Alan Greenspan said yesterday the U.S. economy will gain momentum once the outcome is clear. When that happens, ``we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation,'' Greenspan told the U.S. Senate Banking Committee.
Should a war be short, ``confidence may recover; there may be a recovery in equity markets and the oil price may come back a little bit,'' said Charles Bean, the Bank of England's chief economist. ``Conversely, if it's a much more protracted and nasty conflict, there may be further falls in equity markets, a further rise in the oil price and a further deterioration in confidence.''
Service industries, which kept Britain out of recession, expanded at the slowest pace in 11 months in January. Orders to manufacturers fell and factory employment is the lowest ever.
Last week's move surprised most economists, who had predicted rates would rise next. In January, the median forecast of analysts in the Bloomberg survey was for rates to increase to 4.5 percent by the end of this year.