BoE Watch: City Sighs With Relief As MPC Stands Pat
06 Mar 08:33
By Gonzalo Vina
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The Bank of England kept interest rates steady at 3.75%
Thursday, a decision that was widely expected.
But the unanimous expectation in last week's poll of 21 economists belied a
large degree of uncertainty, after the central bank's Monetary Policy Committee
shocked markets with its decision to cut rates in February.
"We were all expecting this decision given the weakness of sterling," said
Geoffrey Dicks, an economist at the Royal Bank of Scotland. "If they had cut,
it would have been a surprise, but I suppose we were prepared to be surprised
after last month's decision."
The rate freezecomes at an uncertain time for the British economy.
The prospect of war in Iraq is hurting confidence and the country's
manufacturing sector remains unable to lift itself off the ropes. What is more,
the dominant services sector now also seems to weakening, according to a recent
purchasing managers' survey.
For every downside risk to the economy there is another that points the other
way, though. The pound has weakened around 4% on a trade-weighted basis since
the MPC last met and it's still not yet clear how the house-price bubble will
behave or whether the debt buildup will slow. A warning from the International
Monetary Fund about the risks from house prices earlier this week may have
worried some on the MPC.
The committee may also want to wait until the 2003 Budget, which will be
presented just as the its nine members sit down to decide on interest rates
next month. Committee members may have also wanted to see what action their
colleagues at the European Central Bank took.
In the end, the ECB's decision to cut by a quarter percentage point to 2.5%
is a move that many MPC members will likely welcome. Every step taken in the
euro zone and the U.S. to offset weakness gives the U.K. central bank less of a
need to cut rates.
But for now, most analysts believe the global economy is headed downward and,
if that is the case, so will British interest rates.
"The main reason we have cut rates has been for external factors and the
global recovery is just not there yet," said RBS' Dicks.
Helen Roberts, head of government bonds at asset managers F&C, said economic
data since the MPC last met has generally been weaker than expected, providing
"some ammunition" for further rate cuts.
Specifically, recent weeks have seen poor manufacturing and industrial
production data, lower-than-expected average earnings, weakening retail sales
and some signals that house prices may have peaked.
Rises in council tax and National Insurance contributions are also likely to
dampen activity in the second quarter of this year, she added.
"The trend for rates from both the MPC and the ECB is lower," said Ciaran
Barr, an economist at Deutsche Bank. "We reckon U.K. rates will be at 3.0% in a
year."
-By Gonzalo Vina, Dow Jones Newswires; 44 20 7842 9497;
gonzalo.vina@dowjones.com
(END) Dow Jones Newswires
03-06-03 0833ET |
