Further rate cut looms as UK economy falters

City economists believe that the Bank of England could announce an interest rate cut next month as British growth continues to disappoint.

On Friday the first estimate of GDP growth in the first quarter will show the economy falling further below the forecast rate, growing at below 0.4 per cent and possibly as low as 0.2 per cent.

The figures are likely to be at odds with the relatively optimistic forecasts made by Chancellor Gordon Brown for the recent Budget.

A cut by the Bank's Monetary Policy Committee appears back on the cards even after last month's discussion of the arguments favouring a rate hike. In March, the weak pound and the five-year high in inflation prompted more than one committee member to suggest that a move up to 4 per cent was 'finely balanced'.

Further evidence will come on Wednesday when the most up-to-date minutes from this month's MPC meeting, are released. These minutes are expected to show that more MPC members are now seeking a cut.

Alan Castle, UK economist at Lehman Brothers, said: 'For a number of reasons, we continue to expect a 0.25 per cent cut in May... despite the currency move we judge that the net impact of the news since February will be to lower the Bank's growth and inflation projections.'

The diminishing prospects, reflected in business surveys since January, especially last week's British Chambers of Commerce quarterly report, mean that the Bank's GDP forecast is a little optimistic. It is likely that weaker consumer spending will arise from a sluggish rise in average earnings growth, itself a reflection of cut bonuses.

'We fear a sustained rise in unemployment and poor growth in real earnings that would hit consumer spending quite hard. Accordingly, we think the MPC will need to reduce interest rates all the way down to 3 per cent by the end of the year, with the next cut probably coming in May,' said Martin Essex, senior economist at Capital Economics.

House prices too are showing signs of a marked slowdown, particularly in the south-east of England.

'As each week of soft data passes, the chances of a post-war rebound recede and the likelihood that the MPC will need to take action becomes greater,' added Essex.

The Bank is also carrying out the quarterly update of its key economic forecast, an event which, in the past, it has used to alter the monetary policy stance.

But Citigroup economist Michael Saunders believes that high and rising inflation will constrain the Bank's room for manoeuvre.

'Inflation is likely to rise above 3 per cent in the coming months, reaching the highest pace recorded since Bank of England independence,' he said, pointing to the 0.3 percentage point effect of Budget tax measures alone.