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The Organization for Economic Cooperation and Development cut its forecast for U.K. economic growth to reflect the worst market for residential property in almost two decades.

The OECD projects growth will shrink between 0.3 percent and 1.2 percent in the third quarter from a year earlier, and contract 0.4 percent and 1.2 percent in the final three months of the year. The resulting 1.2 percent expansion in 2008 as a whole is lower than the 1.8 percent predicted in June.

The forecast came as the group said the world's leading central banks should leave interest rates at current levels to tame faster inflation while growth slows. The Bank of England will probably leave the key rate at 5 percent on Sept. 4, according to all 61 economists in a Bloomberg News survey.

“House prices exert crucial influences on U.K. activity,'' the OECD's acting chief economist Jorgen Elmeskov told reporters in Paris today. Growth in Britain “is going to more or less stagnate in the second half of the year, and we see that as generating enough slack in the economy eventually to bear down on inflation,'' he said in separate interview on Bloomberg Television guaranteed payday loans.

The central bank said yesterday U.K. mortgage approvals dropped to the lowest in nine years in July. A report last month from Nationwide Building Society showed house prices declined the most since 1990.

U.K. Prime Minister Gordon Brown today suspended a homebuyer tax and proposed spending 1 billion pounds ($1.8 billion) sooner than planned to help reverse the housing slump.

Surveys of purchasing managers in the manufacturing and construction industries published this week indicated growth is contracting, suggesting the economy is edging closer to a recession. U.K. expansion stagnated in the second quarter, ending the longest stretch of expansion in more than a century.

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