UK Economy Returns to Growth Trend, However Rates set to Remain at 4.5%

Bank of Ireland Revises its Growth Forecast to 2.7%

According to the latest UK Economic Review published by Bank of Ireland today (Tuesday 18 July, 2006), the UK economy looks set to grow at around its trend rate over the past decade following a below trend advance of 1.9% last year, which was the worst performance since 1992.

The slowdown, which occurred in the first half of 2005, was primarily due to a substantial weakening in consumer spending with revised figures showing very little real growth in consumption over that period. The broader economy has subsequently picked up momentum, particularly in the fourth quarter, with strong gains in both investment and exports.

Commenting, Dr Dan McLoughlin, Group Chief Economist, Bank of Ireland said: "The rise in exports contributed to a 0.7% advance in first quarter GDP, an upward revision from the original estimate, following a similar rise in the final quarter of 2005. The UK economy is therefore now seen to have had strong momentum entering the year, which has prompted us to revise up our growth forecast to 2.7% from the previous 2.2%."

He maintains that consumption growth is likely to remain relatively subdued however, albeit stronger than last year, given moderate growth in average earnings and a less robust labour market, which has seen the unemployment rate move higher over the past year. The latter has also contributed to a rise in the savings ratio.

He continued: "The market has convinced itself that the economic upturn will prompt the MPC to raise rates, with a quarter point rise priced in by year-end, but we feel this view is wrong - the growth currently unfolding is only around trend level and we feel rates will end the year at 4.5%. Inflation, too, is unlikely to be a serious concern given underlying average earnings growth of 4% and below, and will average 2.2% for the year, although higher energy costs may push it up for a few months."

According to the review, the housing market also looks positive, having recovered from the slowdown of mid-2004. Transactions have picked up substantially from the lows, mortgage approvals are again in a 115,000 to 120,000 monthly range and net mortgage lending is rising at over £9 billion a month. Dr Dan McLaughlin concluded: "Affordability has deteriorated somewhat on our models. We therefore, retain our 6% house price forecast for the year, which looked optimistic six months ago but is now the consensus. Finally to sterling, which we see remaining in a relatively narrow range against the euro, albeit drifting towards our limit of that range at 71 pence by year end. Against the dollar, sterling is expected to remain broadly stable, finishing the year at $1.83."

Ends

Tuesday, 18 July, 2006

For reference:

Gillian Coghill
Marketing Manager
Bank of Ireland Global Markets
Tel:01 609 3302/085 8550134

Anne Mathews
Media Relations Manager
Corporate Communications
Tel:01 604 3836

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