Bank of England set to cut rates as economy slows
The Bank of England looks set to cut interest rates at midday on Thursday to head off a sharp consumer-led slowdown as storm clouds continue to gather over the global economy.
All 60 economists questioned in a Reuters survey expect the Bank to cut rates by a quarter-percentage point to 5.25 per cent. Such a move would knock $60.80 a month off a typical 200,000 repayment mortgage.
While Britain has yet to suffer the type of sharp slowdown seen in the United States, a teetering housing market and slumping consumer confidence mean policymakers are unlikely to sit on their hands.
The recent rise in oil and food prices means the near-term outlook for inflation is not favourable but investors are betting the slowdown may be sharp enough to take interest rates as low as 4.5 per cent by the end of the year.
Evidence that the credit crunch is spilling into the broader economy is stacking up. Consumers are already retrenching and the number of mortgages approved for house purchase -- a lead indicator of the property market -- has fallen to its lowest in a decade.
"Although there are inflationary pressures in the short term, there are clear signs that the economy is beginning to slow," said Ian McCafferty, chief economic adviser at the Confederation of British Industry. "A modest cut now would help ensure a soft economic landing."
The US Federal Reserve has slashed interest rates by 125 basis points over the past month in a bid to stave off recession and a raft of gloomy data over the past week appear to have vindicated its stance.
The US service sector contracted last month to levels not seen since the 2001 recession while US employers cut staff in January for the first time in more than four years.
However, Britain's economy is still growing -- albeit at a slower pace than last year -- and the Bank of England is not expected to follow the same line.
In a speech last month,Bank Governor Mervyn King suggested rapid-fire interest rate cuts were not the answer to financial market woes.
He also said inflation was likely to rise further above target in the coming months, possibly moving above the three percent ceiling that requires the Bank to write a public letter of explanation to the government.
Money markets, which two weeks ago were pricing in a 20 per cent chance of a 50 basis point cut, now show less than a 5 per cent chance of this eventuality.
"I think it will be a 25 basis point cut. Speculation of 50 isn't really justified," said Alan Clarke, economist at BNP Paribas.
Inflation in Britain is currently running at 2.1 per cent and is set to rise in the coming months as the recent rise in crude oil prices feeds into household bills. Inflation expectations among the public are also running at record levels.
The pound's recent fall on the foreign exchanges will only exacerbate inflationary pressures by making imports more expensive. The pound has fallen almost 10 per cent on a trade-weighted basis since last July. (Reuters)
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