By Brian Swint
Nov. 14 (Bloomberg) -- The Bank of England signaled it has room to cut its benchmark interest rate at least once next year to prevent an economic slowdown without boosting inflation.
The inflation rate will settle to the bank's 2 percent target in 2009 after rising above it next year, the central bank said. Its forecasts are based on market assumptions the bank will cut the main rate a quarter point to 5.5 percent in the first quarter. Growth risks are ``on the downside,'' and inflation risks are ``balanced,'' the bank said.
``The central projection is for growth to slow sharply in the next year,'' Bank of England Governor Mervyn King said at a press conference in London today. ``There has been some tightening of credit. Residential and commercial property investment are likely to moderate, possibly quite sharply.''
Britain's economy is cooling from its fastest growth since 2004 after the Monetary Policy Committee lifted the key lending rate to a six-year high. House prices are falling, and service industries expanded at the slowest pace in 4 1/2 years after contagion from the U.S. mortgage market spread.
``The report gives a clear signal that a series of interest rate cuts lies ahead,'' said Vicky Redwood, an economist at Capital Economics Ltd. ``The MPC will wait until early next year to cut.''
Forecast Rates
If policy makers hold the rate at 5.75 percent, inflation will undershoot the target in two years, the forecasts show. The forecasts assume that the key rate averages 5.3 percent in the second half of 2008.
The pound fell after the report, dropping 0.0005 of a penny to $2.0724 at 11:01 a.m. It had traded as high as $2.0844 earlier in the day. Bonds pared earlier losses, with yields on the 2-year gilt falling 1 basis point to 4.8 percent.
``Further financial market fallout, either at home or overseas, poses the biggest downside risk to activity,'' the report said. ``But the impact of that risk on inflation needs to be weighed against the upside risks from higher energy and commodity prices, and from wages and inflation expectations.''
A separate report showed that unemployment fell to the lowest in more than 2 1/2 years in October, as quicker economic growth spurred companies to hire workers.
Unemployment Drop
Claims for unemployment benefits dropped 9,900 from September to 824,000, the least since February 2005, the Office for National Statistics said. The median forecast in a Bloomberg News survey of 29 economists was for a decline of 6,000. The jobless rate was unchanged at 2.6 percent.
``The picture on the labor market is going to turn,'' Kenneth Wattret, a senior economist at BNP Paribas, said in an interview. ``It wouldn't be a surprise if in the next few months small negatives on unemployment turned into small increases.''
King dodged questions about is role in the rescue of Northern Rock Plc, which tapped the central bank for emergency funding in September, saying he would talk to members of Parliament on the Treasury Committee about the matter in the weeks ahead. He also set aside questions about whether he would be reappointed as governor when his term expires next year.
``Everyone involved in this including myself has had more important things to worry about,'' King said in response to a question about whether he wanted another term. ``We're talking about next July. This can wait until the new year and I think it should.''
The U.K. benchmark interest rate is the highest among Group of Seven countries. The U.S. Federal Reserve lowered the U.S. rate twice since August to 4.5 percent to cushion the economy against surging credit costs after banks became reluctant to lend money to each other.
``The U.K. has been a pale shadow of the issues confronting the U.S.,'' King said. ``We too have had a trade deficit, which has been much less than that of the U.S. What is interesting about the last three months, the sterling exchange rate has fallen most against the euro, whereas it's only 2 percent or so up against the dollar.''
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