Bank of England cuts growth forecasts, unemployment rises

LONDON: The Bank of England cut its forecast for UK economic growth and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years. Governor Mervyn King said the inflation rate will fall below the 2% target in two years if policy makers keep the benchmark interest rate at 5%. Claims for jobless benefits climbed 20,100 in July to 864,700, the biggest increase since December 1992, a government report showed.

The pound and government bond yields fell after the reports, which suggested the central bank may have room to lower interest rates as the economy heads toward a recession. Higher unemployment may prompt consumers to curtail spending and exacerbate the worst housing market slump since the early 1990s.

���It may still be summer, but there is a feeling of chill in the economic air,��� King said on Wednesday. The economy faces a ���difficult and painful adjustment��� that ���cannot be avoided. As a result inflation is rising and growth is slowing���. The pound fell to a 21-month low against the dollar.

BNP Paribas SA economist Alan Clarke said the Bank of England may reduce its benchmark rate in November, not in the first quarter of 2009 as he previously predicted.

Unemployment rose for a sixth straight month, with the jobless rate climbing to 2.7% from 2.6% in June. Wages grew at the slowest pace in five years. The economy will grow about 0.1% on a year-on-year basis in the first quarter of 2009, compared with a previous forecast of 1%, the Bank of England projections show. ���Broadly flat output means there is a possibility of a quarter or two of negative growth,��� King said.