OECD warns of slowdown in UK as interest rates are held again

Russell Lynch
9 Sep 2010

Bank of England rate-setters kept their foot on the economic accelerator for the 10th consecutive month today amid new international warnings over the recovery.

The Paris-based Organisation for Economic Co-operation and Development says the UK will fare better than its G7 rivals through the rest of this year.

But chief economist Pier Carlo Padoan expects a “more or less generalised” slowdown later this year and said further stimulus action could be needed.

The Bank's Monetary Policy Committee left interest rates on hold at their 0.5% record low and its money-printing programme unchanged at £200 billion following its latest policy meeting, as expected.

The OECD says the UK will grow at an annual rate of 2.7% in the present quarter — nearly double the 1.4% average across the rest of the G7 — before slowing to 1.5% in the last three months of the year.

It said the UK's domestic recovery was “gaining traction” after improving financial conditions and an export rebound, although the most recent trade figures for July brought this trend to a sudden end today with a record goods deficit of £8.7 billion.

The MPC is more cautious over the recovery and has not shifted its policy stance since last November as it awaits signs of a firm return to health for the UK.

Despite the country's best growth performance in nine years during the second quarter of this year, more recent industry surveys have been more downbeat.

Inflation is also likely to stay above the Bank's 2% target until the end of next year thanks to January's VAT rise, which is likely to have prompted another vote for dearer money from MPC hawk Andrew Sentance.

ING Bank's James Knightley said rates could stay on hold until the end of next year. “The growth story is taking a downward leg,” he said.