U.K. Rate Lowest Since Churchill (Update2)
By Julia Kollewe with reporting by Reed V. Landberg
London, Feb. 6 (Bloomberg) -- The Bank of England unexpectedly cut its benchmark rate to the lowest level since 1955, Winston Churchill's last year as prime minister, in an effort to spur growth in Europe's second-largest economy.
Governor Sir Edward George and his eight colleagues on the bank's Monetary Policy Committee lowered the securities repurchase rate by a quarter point to 3.75 percent at their monthly meeting. The European Central Bank kept its rate at 2.75 percent and signaled it may reduce borrowing costs.
``Manufacturing appears to be sliding back into recession after some tentative signs of recovery towards the end of 2002, and the consumer is turning more cautious,'' said Simon Rubinsohn, chief economist at Gerrard Ltd. in London, which manages 17 billion pounds ($27.3 billion) in stocks and bonds.
Government notes surged and futures contracts indicated another cut before the end of June. Britain's economy grew 1.7 percent last year, the least in a decade. Services industries including banks, airlines and hotels expanded at the slowest pace in almost a year while manufacturing orders shrank, surveys of purchasing managers showed this week.
The Bank of England may cut rates again as soon as April, said Ciaran Barr, chief U.K. economist at Deutsche Bank AG, who was alone among the 29 economists surveyed by Bloomberg News to predict today's move. Barr changed his prediction to a rate cut from no change after the industry surveys this week.
``Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated,'' the Bank of England said in a statement. Today's reduction is the first since 2001, when policy makers cut rates seven times.
ECB Considers Cut
The ECB, which sets monetary policy for the dozen nations sharing the euro, kept its rate at the lowest in three years after lowering it by half a point in December. The U.S. Federal Reserve trimmed its overnight lending rate to 1.25 percent in November.
More than half of Britain's exports are bought by customers in the euro region, which may contract as much as 0.1 percent this quarter. The U.K., Sweden and Denmark are the only members of the 15-nation European Union not to adopt the euro.
``The risks to growth have certainly not disappeared,'' ECB President Wim Duisenberg told a press conference. ``I'm inclined to say they have been exacerbated.''
The ECB, which still predicts growth will pick up in the second half, balked at a cut today because lower borrowing costs wouldn't make a difference for companies and consumers concerned about a war with Iraq.
A reduction ``at this moment would drown in the sea of uncertainties'' surrounding the prospect of a U.S.-led attack on Iraq, Duisenberg said.
`Lot of Worry'
U.K. two-year notes posted their biggest one-day gain since September 2001. The yield on the 6 3/4 percent U.K. note maturing in November 2004 declined 19 basis points to 3.39 percent as of 5:19 p.m. in London. A basis point is 0.01 percentage point. The benchmark FTSE-100 Index fell 2.9 percent to 3571.2.
Investors are counting on another cut, futures trading suggests. The rate on a three-month sterling deposit maturing in June fell 24 basis points after the decision to 3.47 percent.
``There is a lot of worry out there'' about a prolonged war with Iraq, said Barr at Deutsche Bank. ``The bank knows the possibility of war will have a damaging effect on confidence and they want to get a move in before.''
HSBC Holdings Plc, Lloyds TSB Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc cut their base lending rates to 3.75 percent from 4 percent, matching the central bank's move.
Job Cuts
The FTSE-100 index has declined 8.6 percent this year after shedding 24 percent last year. Dixons Group Plc, Europe's second- largest electrical retailer, said fiscal 2003 earnings will barely grow as shoppers pare spending. Imperial Chemical Industries Plc, the country's largest specialty chemical maker, said today it's cutting more jobs to reduce costs.
Shares of Aviva Plc and Prudential Plc have lost 45 percent of their value in the past 12 months as slumping stock markets wiped out capital the insurers used to pay claims. The average U.K. insurer has about half its investments in equities, compared with an average 30 percent in other European countries, according to Moody's Investors Service.
Factory jobs are at a record low, according to government figures, while another 42,000 will be lost this quarter, the Confederation of British Industry estimates. U.K. manufacturing was the weakest in the Group of Seven nations last year, said Michael Saunders, an economist at Schroder Salomon Smith Barney.
Inflation Forecast
The central bank will publish its quarterly forecasts for economic growth and inflation next week. In its November report, policy makers predicted inflation, which was 2.7 percent last month, will exceed its 2.5 percent target for much of the year.
``Inflation has, as expected, moved a little above target, but this is the result of temporarily large contributions from petrol prices and from housing,'' the bank said in the statement. ``These influences on inflation will persist for some time but are expected to unwind further ahead.''
Seven rate reductions, by a total of 2 percentage points, in 2001 encouraged shoppers to boost spending and led to a surge in house prices. Dwelling costs increased at the fastest pace in January since records began in 1991, according to Nationwide Building Society, the country's fifth-largest mortgage lender.
Gross domestic product rose 0.4 percent in the fourth quarter, compared with 0.9 percent in the previous three months. Germany, Europe's largest economy, stagnated at the end of last year, the government has estimated.
W.H. Smith Plc, Britain's biggest bookseller, said last week its Christmas sales fell. Allied Domecq Plc, the world's second- largest liquor maker with brands such as Beefeater gin, said this week that profit growth will stall this year. |
