The Bank of England yesterday damped expectations of another interest rate cut in the near future, even though it expects weaker economic growth than the Treasury over the next two years if rates stay on hold.
In its latest quarterly report, the UK central bank said the planned minimum wage would help nudge underlying inflation - which excludes mortgage interest payments - up to 2.75 per cent in the middle of next year, before it drops back towards the government's 2.5 per cent target.
If interest rates stay at their current 6.75 per cent, the Bank believes there is a 55 per cent probability that inflation will undershoot the target in two years. This does not provide sufficient room for manoeuvre to justify further rate cuts yet. The bank expects a sharp slowdown in the economy next year, but like the Treasury it sees only an outside chance of recession. Since the last inflation report in August, the world economy has weakened, share prices have fallen 5 per cent and business and consumer confidence have tumbled.
Analysts estimate that the bank is pencilling in a little under 1 per cent growth next year and 1.75 per cent in 2000. Last week the Treasury predicted 1 per cent and 2.25 per cent respectively.
The Bank warned that rate cuts of the magnitude expected in financial markets - to 6 per cent or below - would see inflation overshoot the target. The pound reversed some of an overnight fall, but ended down from Tuesday's close.
