OECD downgrades forecast for British growth

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Britain's economy will grow by 1.5 percent this year, the OECD forecast Wednesday after downgrading its previous estimate for GDP expansion of 1.7 percent due to "significant headwinds" seen in 2011.

In a report, the Organisation for Economic Cooperation and Development said Britain's recovery that began in late 2009 "faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive."

In a bid to support recovery, the Bank of England has kept its key interest rate at a record low 0.50 percent since March 2009 and has injected £200 billion (235 billion euros, $322 billion) into the economy.

"With policy rates close to zero, quantitative easing (QE) at £200 billion (14% of GDP) and liquidity schemes still in place, monetary policy is highly expansionary," the OECD pointed out in its study.

Interest rates "should rise only slowly from mid-2011 onwards as long as inflation expectations do not drift too far from the target," added the Paris-based policy and research body for governments of 34 leading economies.

The Bank of England (BoE) is maintaining record-low rates as soaring commodity prices pushed up British annual inflation to a two-year high of 4.0 percent in January, double the BoE target.

The OECD meanwhile said that QE "should be withdrawn in an orderly and pre-announced fashion once policy rates have risen from their current low level.

"The BoE will, however, need to react sooner if inflation expectations begin to rise considerably or feed through to significant wage increases."

It added that "recovery is likely to remain subdued in 2011, as the necessary fiscal tightening and a fading rebound in world trade create headwinds, before picking up again in 2012."

The OECD said it expected British GDP to grow 2.0 percent in 2012, unchanged from its November forecasts.

Britain's Conservative-Liberal Democrat government has forecast GDP growth of 2.1 percent this year and 2.6 percent in 2012. But analysts say such estimates are too optimistic, given the size of its cost-cutting plans to reduce a huge deficit.

The British economy suffered a shock contraction in the final three months of last year, although the BoE has said that the country is likely to avoid a double-dip recession.

Gross domestic product shrank by 0.6 percent in the three months to December, according to recent official data which partly blamed freezing wintry weather late last year.

The OECD's latest GDP forecasts and assessment of the economy come a week before the British coalition government's annual budget presentation to the nation.

© 2011 AFP

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