MW: Bank of England prepared to cut again, King says
Central bank slashes forecasts for inflation, economic growth
LONDON (MarketWatch) -- The Bank of England is prepared to cut interest rates again as the central bank anticipates a further contraction in economic growth amid prospects that consumer price inflation could fall far below its 2% annual target, Governor Mervyn King said Wednesday.
During a news conference to unveil its latest quarterly inflation report, King said the central bank's Monetary Policy Committee was ready to cut the official benchmark rate to whatever level necessary to keep the annual CPI rate near the target.
The Bank of England shocked markets last week by slashing its key lending rate by 1.5 percentage points, down to 3%. The cut was the largest ever undertaken by the Monetary Policy Committee since it was formed in 1997, while the rate was pushed to its lowest level since the mid-1950s. See full story.
In a further round of firsts, the November inflation report contains the largest-ever cut in the Monetary Policy Committee's inflation forecasts. The report warned that inflation was on track to slip well below 2% by 2010 if official rates follow the path currently implied by financial markets.
In his remarks, King said Bank of England officials couldn't rule out the possibility of deflation, but the report noted that the risk of a period of broadly falling prices remained small.
"In the central projection, inflation falls back sharply from its current high level in the near term, as the contribution from energy and food prices declines steeply," the report said. "Further out, inflation falls well below the 2% target, reflecting a larger margin of spare capacity and the waning impact on import prices from the lower level of sterling."
The projections show inflation falling below 2% in 2009 if the key rate is left at its current level of 3%, dipping below 1% by 2010.
"Basically, today's inflation report is a courageous acknowledgment that [the MPC is] definitely behind the curve and quick action is definitely needed," said Chiara Corsa, an economist at UniCredit MIB in Milan.
"The need to boost confidence at the current juncture is another additional reason in favor of further decisive and quick action. There is no room to wait, Corsa said.
The economist remains of the view that the Monetary Policy Committee will cut the key rate by another percentage point, to 2%, in December, and then ease it to 1.5% in Janary.
Echoing remarks by King last month, the Bank of England's report says the British economy likely entered recession in the second half of this year.
The economic projections, however, factor in a "substantial" degree of stimulus from cuts assumed in the Bank of England's lending rate, a gradual expansion in credit supply following efforts to recapitalize trouble banks, lower world energy and food prices, and a weaker British pound.
The Bank of England laid out a pair of scenarios about what the future may hold for the U.K. economy.
"The slowdown may be deeper and longer lasting, if the supply of money and credit tightens further at home and abroad, if households and companies have to make bigger balance-sheet adjustments, or if there is a larger shake-out in the labor market," the report noted.
On the other hand, the slowdown may be muted if bank lending and money markets recover more rapidly or if the government provides a strong fiscal boost to the economy, the report said.
