An expected rate cut by the Bank of England - given fresh impetus by yesterday's quarterly inflation report - could be as high as 0.5% by late Spring, New Star's Simon Ward says.
Ward says the two-year-ahead inflation forecast assuming unchanged 5.75% rates is far below target at an estimated 1.75%, pointing out this is the largest negative deviation in the history of the Monetary Policy Committee.
He adds the GDP forecast based on unchanged rates shows annual growth slowing sharply from 3.3% currently to below 2% by the third quarter of 2008.
However, Ward questions why the Bank didn’t use this economic data as justification for a rate cut last week.
“Risks to the forecast are judged to be balanced for inflation and on the downside for growth, versus on the upside and balanced respectively in the August Report,” he says.
“So why were rates not cut last week? The minutes will reveal more but the MPC probably wanted to set out its revised economic thinking before acting to avoid accusations of bailing out the financial sector.
“The forecast that inflation will remain slightly above target during 2008 may also have influenced the majority decision to delay.
“Time will tell whether recent financial events warrant the MPC’s dramatic forecast revisions; the economy could well prove more resilient than assumed.
“However, the Committee’s bias is clear and it is reasonable to expect two quarter-point rate cuts by next spring.”
The Bank of England’s quarterly inflation report warned the economy is likely to slow in 2008 with inflation expected to accelerate.
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