King May Give Rate Clues in Inflation, Growth Outlook (Update1)

By John Fraher

May 12 (Bloomberg) -- Bank of England Governor Mervyn King will this week map out how much room policy makers see for interest-rate cuts as they struggle with faster inflation and signs the economy may be heading for a recession.

King will present the central bank's quarterly economic forecasts in its inflation report on May 14. The Office for National Statistics will say tomorrow that consumer prices rose 2.6 percent in April from a year earlier, the most in 12 months, the median forecast of 37 economists in a Bloomberg survey shows.

U.K. policy makers are grappling with record food and oil prices just as the global credit squeeze and the worst housing downturn in 12 years threaten to derail the British economy. Economists predict the bank will lower the benchmark interest rate by a quarter point to 4.75 percent as soon as next month.

``The inflation report will be supportive of the need to cut interest rates further,'' said George Buckley, U.K. economist at Deutsche Bank AG in London. ``Inflation will eventually improve because of the economy, which we think will be substantially weaker than it's been over the past two years.''

Producer prices rose 7.5 percent in April from a year earlier, the fastest pace since 1986, the Office for National Statistics said today. Economists had predicted a gain of 6.4 percent, the median of 26 forecasts in a Bloomberg survey showed. The pound jumped 0.4 percent to $1.9561.

Rate Cuts

The Bank of England will cut its interest rate to 4.25 percent in three quarter-point steps by the end of the year, according to the median forecast of 22 economists. The central bank left it at 5 percent on May 8.

The Bank of England has been reluctant to cut its rate, the highest among the Group of Seven nations, as fast as the Federal Reserve. The U.S. central bank reduced its main rate to 2 percent on April 29, the lowest since 2004.

King said the same day that U.K. inflation may exceed the government's 3 percent limit this year for only the second time in the bank's decade-long history of rate-setting. The price of oil, which has more than doubled in the past year, rose above $125 per barrel for the first time on May 9, and wheat prices have increased 75 percent in the same period.

Bank of England forecasts will ``probably show further inflation threats and inflation risks,'' Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London, said in an interview on Bloomberg Television. At the same time, ``growth prospects may have continued to deteriorate. I'd say more bad news from the U.K.''

Voter Displeasure

The economic slowdown is contributing to a decline in Prime Minister Gordon Brown's popularity. His Labour Party slumped to its worst performance since at least the early 1970s in local elections on May 1, the first ballot-box test since Brown took over from Tony Blair in June.

U.K. house prices posted the first annual decline since 1996 in April as mortgage lending dried up, the services industry expanded at the slowest pace in five years and construction shrank the most in almost a decade, reports showed in the past week.

Unemployment probably stopped falling in April, with no change in the claimant count, according to the median of 31 economists in a Bloomberg survey. The statistics office will release that data at 9:30 a.m. on May 14.

``The outlook for the economy is deteriorating quite quickly,'' Juergen Michels, an economist at Citigroup Inc. in London, said in an interview on Bloomberg Television. ``It's a bit of a dilemma'' for the Bank of England.

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net

Last Updated: May 12, 2008 04:55 EDT

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