Stagnant UK 'doesn't need more rate cuts

The UK economy is 'stuck in first gear', needing a surge in business investment and exports, but no further rate cuts, say forecasters.

The Ernst & Young Item Club, which uses the Treasury's own economic model to forecast trends, will say tomorrow that the UK economy will remain sluggish for the rest of the year as a stuttering housing market holds back consumer spending.

'Growth remains sub-trend as the UK economy rebalances. The Item forecast shows the UK economy growing by 1.7 per cent this year,' says Peter Spencer, Item's economic adviser.

That analysis is likely to be born out by preliminary figures for UK GDP growth in the second quarter, due out on Friday. City economists expect that quarterly growth will creep along at 0.3 per cent, compared with near- stagnant first quarter growth of 0.1 per cent.

'While a slowdown in the intense price rises of recent years is welcome, the number of people moving home is now lower than at any time since 1996. Potential purchasers, particularly first-time buyers, are really strug gling to find affordable housing,' says Spencer.

A further cut in base rates below the current rate of 3.5 per cent is unwarranted, says the report, because its impetus 'would only come through next year and by that time the economy will be in upswing'.

However, a separate analysis of the impact of a change to the Bank of England's inflation target says that rates may be kept lower, for longer, because of the shift.

'The MPC will be asked to target 2 per cent. The rate-neutral equivalent of the current target is 1.7 per cent,' says David Hillier, UK economist at Barclays Capital.

City economists are eagerly awaiting this week's release of minutes from July's MPC meeting. The minutes will reveal any change of approach under new Governor Mervyn King.