March 5, 2020 / 8:55 AM / in a month

Deutsche Bank halves UK growth forecast, predicts BoE cuts

FILE PHOTO: People walk through autumnal leaves in front of the financial district in London, Britain, November 21, 2019. REUTERS/Hannah McKay/File Photo

(Reuters) - Deutsche Bank analysts have cut their forecast for British economic growth this year to just 0.5%, citing the rapid spread of the coronavirus and saying the Bank of England could cut interest rates twice by May in response.

Fears of a recession spurred the biggest stock market sell-off in a decade last week and many analysts have trimmed their growth projections, with Bank of America last week cutting its world growth forecast to 2.8%, the lowest since 2009.

DB economists Sanjay Raja and Oliver Harvey said weaker global growth, supply chain disruptions and subdued household demand would weigh on UK numbers this year and pulled forward their previous call for a quarter point cut in official interest rates from August to March.

They had previously expected growth of around 1%.

“We see a high risk of a further 25 basis point rate cut in May (by the Bank of England), though this will depend on the spread and duration of the crisis,” they said in a morning note to clients.

“We also expect the MPC to announce a range of targeted measures aimed at increasing liquidity and loosening financial conditions, including a further roll out of the Bank’s term funding scheme alongside a drop in the counter cyclical capital buffer (for banks),” they added.

The Bank of England kept rates steady in January as it saw signs of a post-election pick-up and its next governor, Andrew Bailey, on Wednesday said it should hold off with any immediate response to the coronavirus outbreak.

Investors, however, have ramped up bets that the BoE will follow the lead of the U.S. Federal Reserve and the Bank of Canada and cut rates, possibly before its first scheduled policy announcement under Bailey on March 26.

Reporting by Jasmine I S and Tanvi Mehta in Bengaluru; editing by Patrick Graham

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