Bank of England Says Risks to Growth `Heavily to the Downside'

By Svenja O'Donnell

Feb. 11 (Bloomberg) -- The Bank of England cut its forecasts for gross domestic product and inflation and said that the risks to U.K. economic growth lie ``heavily to the downside'' as governments struggle to save the financial system from collapse.

The British economy will contract at an annual 4 percent rate by the end of the first quarter and inflation will trough at about 0.5 percent at the end of next year, the central bank's forecasts released today in London show.

Bank of England policy makers cut the benchmark interest rate to the lowest ever on Feb. 5 and may start buying corporate debt in the next few days as they seek other ways to aid the British economy. Cabinet minister Ed Balls said this week that the government faces an economic crisis worse than the Great Depression of the 1930s.

While the bank's main view is that actions to stabilize the global banking system will work, the risk that they ``prove only partly successful over the forecast period, leading to a more prolonged period of weak credit availability and spending, poses a significant downside risk,'' the bank said. ``The risks to growth are weighted heavily to the downside.'' 

The Bank of England forecasts are based on market expectations of the benchmark interest rate falling from the current 1 percent to 0.7 percent in the third quarter. The bank publishes its quarterly predictions in the form of fan charts without specifying exact numbers. It will release data indicating exact figures next week.

`Darkest Hour' 

``The fourth quarter and the first quarter will probably be the darkest hour of this recession,'' Neville Hill, an economist at Credit Suisse Group in London, who formerly worked at the U.K. Treasury, said before the report's release. ``There's still a lot of uncertainty.'' 

The central bank's Monetary Policy Committee may decide to engage in measures such as buying assets to help the economy as interest rates lose their potency, the report said. If so, the main objective will be to reach the 2 percent inflation target.

``If the MPC were to adopt unconventional measures in the future, that commitment would be a crucial element in ensuring the efficacy of policy, helping (as now) to anchor inflation expectations and boost nominal spending,'' the bank said.

Britain faces the worst recession among Group of Seven nations, the International Monetary Fund forecasts. World growth will slow to 0.5 percent this year, the least since the end of World War II, the IMF said.
The U.K.'s inflation rate fell the most since at least 1997 in December. Consumer prices rose an annual 3.1 percent, compared with 4.1 percent the previous month.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.
Last Updated: February 11, 2009 05:30 EST