UK rates near peak after dovish BoE MPC minutes
Wednesday, September 22, 2004 11:04:03 AM
----by Pan Pylas---- LONDON (AFX) - It looks more and more likely that the cost of borrowing in the UK is at, or near, its peak, following an extremely dovish set of minutes of the last meeting of the Bank of England's rate-setting body
The Monetary Policy Committee, which unanimously decided to keep its key repo rate unchanged at 4.75 pct at its last meeting on September 9, noted that third quarter GDP could be lower than anticipated, and that house price inflation may ease by more than forecast, with the consequent downward effects on consumption
In addition, the nine-member body said the labour market had been "surprisingly weak", adding that it was puzzled by the softness in pay pressures
"Todays minutes, although presenting the UK economy as robust, attract attention to the future possible problems and sound the least optimistic for several months," said Andrij Halushka, economist at the Centre for Economic and Business Research
Short sterling, a gauge of near-term interest rate expectations, is pricing in just one further quarter point hike, most probably in November, alongside the central bank's next quarterly Inflation Report
"The fact that some members still considered the arguments for a rate hike -- that sterling growth was still above trend and the pound had fallen -- suggests that it is too early to conclude that interest rates have now peaked," said Jonathan Loynes, chief UK economist at Capital Economics
"As such, we still expect another quarter point hike in November, but that now looks likely to be the peak," he added
The MPC has raised the cost of borrowing by a quarter point on five occasions since last November, taking its key repo rate up to 4.75 pct, in an attempt to rein in inflationary pressures, stemming primarily from rampant consumer demand, particularly in the housing market. "These minutes demonstrate a growing sense of comfort that earlier rate hikes are already doing enough to head off any inflationary bubble," said Daragh Maher, a senior forex strategist at CALYON
"Markets may have to quickly decide whether we have already seen the peak in interest rates, particularly if the housing data remains weak," he added
A raft of data earlier this week from the likes of the British Bankers Association and the Council of Mortgage Lenders, all pointed in the same direction, that Britons have started to check their appetite for borrowing. If upcoming data releases, especially from the Halifax, the UK's largest mortgage lender, and the Nationwide, the UK's biggest building society, are weak, then the odds against a November rate hike may shorten
Capital Economics' Loynes said rates may even start to fall next year if the housing downturn gathers pace, as he expects
"We now expect a fall from 5.00 pct to 4.50 pct by the end of 2005, suggesting plenty of scope for market expectations for rates next year to fall further," he added
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