Bank of England Cuts Growth Forecasts, Jobless Climbs (Update1)
By Jennifer Ryan and Brian Swint
Aug. 13 (Bloomberg) -- The Bank of England cut its forecast for U.K. economic growth and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years in July.
Governor Mervyn King said the inflation rate will fall below the 2 percent target in two years if policy makers keep the benchmark interest rate at 5 percent. Claims for jobless benefits climbed 20,100 from June to 864,700, the biggest increase since December 1992, a government report showed.
The pound and government bond yields fell after the reports, which suggested the central bank has room to lower interest rates as the economy heads toward a recession. Higher unemployment may prompt consumers to curtail spending and exacerbate the worst housing market slump since the early 1990s.
``It may still be summer but there is a feeling of chill in the economic air,'' King said at a press conference in London today. The economy faces a ``difficult and painful adjustment'' that ``cannot be avoided. As a result inflation is rising and growth is slowing.''
The pound fell to a 21-month low against the dollar. The British currency dropped to $1.8777 at 11:25 am in London from $1.8968 yesterday. Two-year gilts jumped, cutting their yield 13 basis points to 4.509 percent.
Economists had predicted the jobless count would rise 17,000, according to the median of 31 forecasts in a Bloomberg News survey. Wages rose the least in five years in the second quarter.
Sixth Increase
Unemployment rose last month for a sixth straight month, and the increase in June was revised to 20,000 from 15,500. The unemployment rate in July rose to 2.7 percent from 2.6 percent.
Unemployment based on International Labour Organization standards was 5.4 percent in the three months through June, the highest since September last year. It compares with 7.3 percent in the euro region, 5.7 percent in the U.S. and 4.1 percent in Japan, the statistics office said.
``The weakness in the labor market will weigh on consumer spending and growth,'' said Jeavon Lolay, an economist at Lloyds TSB Bank Plc in London. ``We still see rates on hold next year because inflation has to be the priority for the bank.''
The economy will grow about 0.1 percent on a year-on-year basis in the first quarter of 2009, compared with a previous forecast of 1 percent, the Bank of England forecasts show.
`Broadly Flat'
``Broadly flat output means there is a possibly of a quarter or two of negative growth,'' King said, when asked about the risk of a recession. ``There are clearly downside risks.''
U.K. stocks pared earlier losses. The FTSE 100 Index slid 25.4, or 0.5 percent, to 5,509.5. The FTSE All-Share Index fell 0.6 percent.
ITV Plc, the U.K.'s biggest commercial broadcaster, said Aug. 6 it will cut jobs after advertising sales fell 10 percent in the third quarter and it slashes 35 million pounds ($66 million) of costs by the end of 2010.
Royal Bank of Scotland Group Plc, the biggest U.K. bank, said Aug. 8 it may shed as many as 7,000 jobs by 2010 after writedowns and merger costs led to its first loss since going public 40 years ago.
Homebuilders including Redrow Plc and Bovis Homes Group Plc announced more than 4,000 job cuts since the start of July after the housing slump left developers with unsold properties. Dresdner Kleinwort analyst Alistair Stewart yesterday warned of the ``grimmest'' homebuilding earnings for decades and urged investors to abandon the stocks.
Credit Crunch
The collapse of the U.S. subprime mortgage market has cost European banks $228 billion in writedowns and led them to shed 23,255 jobs. U.K. lenders, trying to shore up capital, restricted credit and kept mortgage rates close to the highest in eight years.
Job losses threaten to deepen the unpopularity of Prime Minister Gordon Brown, whose Labour Party trails behind the opposition Conservatives by 20 points in opinion polls. With the U.K. budget deficit among the highest in Europe, Brown has limited scope to ease the strains by boosting spending.
Brown has until June 2010 to hold the next election, and government hopes of an economic rebound before then are dimming. The International Monetary Fund last week slashed its forecasts for U.K. growth, and Ernst & Young Item Club said in July that ILO unemployment may rise by a quarter to more than 2 million by 2010.
The Bank of England has left its benchmark rate at 5 percent since April to deter workers from demanding more pay to keep pace with living costs and fueling higher inflation, which reached a decade-high of 4.4 percent in July. King said inflation may peak at about 5 percent before retreating toward target.
Wages Slow
Growth in average earnings fell to 3.4 percent in the three months through June, the lowest since August 2003 and down from 3.8 percent in the quarter through May. Excluding bonuses, the pace slowed 0.1 percentage point to 3.7 percent, the least since January.
Based on ILO methods, unemployment in the second quarter rose 60,000 to 1.67 million, the highest since February-April last year. Employment rose 20,000 to 29.6 million.
Vacancies at job centers in the three months through July fell 47,400 to 634,900, the lowest since December 2006.
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