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Bank Ready To Cut Rates Amid UK Growth Fears

The Bank of England has cut its forecasts for UK economic growth to the weakest level in three years and said that it stands ready to cut interest rates if there is another slump.

In a sign of growing concern about the recovery, the Bank voted unanimously to leave the official borrowing rate on hold at 0.5%, with one Monetary Policy Committee member saying he was no longer in favour of a hike.

It (Other OTC: ITGL - news) comes amid growing speculation that the next move in borrowing costs could be down rather than up.

In its quarterly Inflation Report, the Bank cut its forecast for economic growth this year from 2.5% to 2.2% and reduced its 2017 projection from 2.7% to 2.4%. It also cut its forecast for CPI (Other OTC: CPICQ - news) inflation from 1.5% this year to 1.2%.

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The report will reinforce suspicions that, having signalled only months ago that a rate hike was imminent, the Governor, Mark Carney, is likely to sit on his hands for at least another year.

Based on investors' expectations, as reflected in money markets, the first increase in borrowing costs is now not expected until August 2018 - after Mr Carney’s initial five-year term comes to an end.

Markets are also pricing in a 30% probability that the next move in rates is down rather than up.

Although the minutes to the MPC (KOSDAQ: 050540.KQ - news) decision today stated that "it was more likely than not that Bank Rate will need to increase over the forecast period", in a letter to the Chancellor explaining why inflation remains well below the 2% target, Mr Carney said: "The Committee could also decide to extend the Asset Purchase Facility or to cut Bank Rate further towards zero from its current level of 0.5%."

UK interest rates are already at the lowest level since the Bank was founded in 1692, but in recent years other central banks, including the European Central Bank and Bank of Japan have decided not only to cut borrowing costs further but to drop them into negative territory.

Most economists still expect the next move in UK interest rates to be up rather than down, though it may not arrive for some years.