ANALYSIS: Next move for interest rates could be down rather than up.(economic forecast for Great Britain)(Brief Article)(Statistical Data Included)

Contrary to some beliefs, interest rates could in fact move down, not up, as David Ross explains

In its August Inflation Report, the Bank of England revised down its forecasts for GDP growth for the second half of this year, for next year and for 2004. Among other explanations for its decision, it blamed the fall in the stock markets and their volatility. It also believes that inflation will be lower than previously predicted and that it will remain below target during most of the forecast period.

At the time of publication, the Bank did not know that, in June, manufacturing output had suffered its largest monthly reverse since January 1979. While the 5.3% fall was largely attributable to the extra bank holiday to mark the Queen's Golden Jubilee and to absences related to the World Cup, it is worrying. According to the data, the print sector recorded a particularly large drop of 6.4%. This month's data should show that June's data was an aberration, and not the beginning of a new slump in printing. Figures released two weeks ago show that the unexpectedly large fall in manufacturing output in June reduced second-quarter GDP growth from an originally estimated 0.9% to 0.6%. Growth dropped to trend levels.

The poor data, combined with slowing retail sales growth and Chartered Institute of Purchasing Managers' service and manufacturing survey, explain why the Monetary Policy Committee voted to leave interest rates unchanged at 4% for the ninth successive month. The committee's minutes revealed that there was mounting concern about both the UK's and the international economies.

At least Sir Edward George, governor of the Bank of England, does not need to add to his chores by writing a letter to the chancellor explaining why inflation has fallen by ...