Bank of England should hold rates steady: OECD

The OECD also warned that the government deficit could widen to more than 3.5 per cent of output, threatening the British economy's "golden rule."      

That rule stipulates that over the life of a 10-12-year economic cycle, the government will borrow money only for investment and to fund current spending.      

"It is clear that much tighter fiscal policy will be required in the future if the rule is still to be respected," the OECD said in its twice-yearly survey of global economic prospects.      

 

While projected economic weakness in 2009 would argue against budgetary restraint, "the government's options have been limited by excessively loose fiscal policy in past years when economic growth was strong," the OECD found.      

The report predicts British economic growth will fall sharply to 1.8 per cent this year, from 3.0 per cent in 2007, and to 1.4 per cent in 2009.      

In its last estimate, issued in December 2007, the OECD projected momentum of 2.0 per cent in 2008 and 2.4 per cent in 2009.      

Growth declined to an annual 1.5 per cent in the first quarter of 2008, with "a further slowing ... Expected over coming quarters, as both investment and consumer demand are damped by tight credit conditions and housing market weakness," the OECD said.