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Economists trim Britain's growth forecasts, don't see rate hike until year-end: Reuters poll
February 12, 2016 / 11:53 AM / 2 years ago

Economists trim Britain's growth forecasts, don't see rate hike until year-end: Reuters poll

Workers are seen on a construction site in London, Britain June 4, 2015. REUTERS/Neil Hall

LONDON (Reuters) - Economists have trimmed their growth forecasts for Britain as a result of global market turmoil and don’t see the Bank of England raising interest rates until the dying months of the year, a Reuters poll found.

Since the start of 2016, economists have pushed back expectations as to when Bank Rate would rise from a record low 0.5 percent twice and the current median forecast is for a fourth quarter 25 basis point increase, the same as in a Jan. 26 poll.

Markets have been battered during this year in part by concerns the Chinese economy is struggling. They are not pricing in the first rise for several years and some even are betting on the first move being a cut.

But economists gave only a median 15 percent likelihood that would happen.

“It looks very unlikely right now. There is little, if any, spare capacity in the UK economy, and employment growth remains robust,” said Daniel Vernazza at UniCredit.

”We think it would take an outright recession for the BoE to cut from here, not the modest slowdown we expect. Brexit (Britain leaving the European Union after a referendum) could change that, but it’s a tail risk.

Prime Minister David Cameron has promised a vote on whether Britain should stay or leave the European Union under a “Brexit” scenario, and economists have previously flagged the uncertainty around the outcome as a the biggest threat to Britain’s economy.

Britain’s economy will be worse off following a vote to leave the European Union, which economists and academics in a sister poll gave a 40 percent chance of happening.

Despite the darkening global economic outlook and the Brexit uncertainty, British consumer demand has been buoyed by low inflation, record employment and a moderate increase in wages.

Inflation has been kept down by crude prices, which have tumbled over 70 percent since mid-2014, and the Bank has so far failed to get it anywhere near its 2 percent target - and it will be well into 2017 at least before it does, the poll found.

It will average just 0.8 percent this year and 1.7 next, down from January’s 1.1 and 1.9 percent respective forecasts.

Also keeping prices down, sterling GBP= has struggled to remain strong after the United States Federal Reserve tightened policy late last year for the first time in nearly a decade.

On Monday, sterling fell to a 13-month low against the euro EURGBP, the currency of its main trading partner, which should provide a lift to exports. Yet the deficit in trade of goods to the EU widened to a new record in the fourth quarter of 2015.

With global demand wavering some of the 53 economists in the poll trimmed their outlook for Britain’s economy. Medians now suggest it will grow 0.5 percent this quarter and next, slightly less than the 0.6 percent predicted a month ago.

In 2016 and 2017 growth will be 2.2 percent, also down from the 2.3 percent predicted in January.

As the growth outlook remains tepid, when Bank Rate does start to rise its ascent won’t be rapid, the poll suggested. At the end of 2017 it will be 1.25 percent and then have risen to 2.00 percent a year later.

Polling by Shrutee Sarkar Editing by Jeremy Gaunt

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