BoE cuts interest rates, may hold for a while
today.reuters.co.uk
LONDON (Reuters) - The Bank of England cut interest rates on Thursday by a quarter point to 4.5 percent to shore up weakened household and business spending, but analysts said the central bank would probably wait a while before another move.
The Monetary Policy Committee's first cut in rates in two years comes as economic growth in the world's fourth largest economy has cooled rapidly and was widely expected by analysts and financial markets.
In explaining its move, the central bank said while there were signs that consumer spending may be picking up, the threat remained that spending could weaken further.
But the BoE also said that a rising stock market -- now trading at its highest in more than 3-1/2 years -- and the recent fall in the pound should boost future growth, which most analysts said signalled any future move is probably a way off.
It also said that rising oil prices, which are trading near record highs, could push up inflation in the near-term.
"This move represents a bit of economic fine-tuning on the MPC's behalf, with a view to shoring up domestic demand. Rates may fall further yet, but the Committee will not be in any great hurry," said Andrew McLaughlin, chief economist at the Royal Bank of Scotland Group.
Next week's quarterly Inflation Report, where the BoE outlines in detail its outlook for growth and inflation, is key to where rates will go in coming months.
Most expect the outlook for growth to have deteriorated -- some say significantly -- since the last set of forecasts were made, in part following recent extensive revisions to what growth looked like in the recent past.
In any case Thursday's cut in borrowing costs, decided at the 100th meeting since the MPC's inception, came as little surprise given that four of the nine members had already voted for such an easing in July.
The European Central Bank left its base interest rate unchanged at 2 percent, where it has remained for more than two years, as surveys suggesting business conditions are improving backs its view that growth there will gather momentum.
Short-dated government bond yields fell, while short sterling interest rate futures rose modestly after the BoE's decision as some dealers bet rates could fall again, but not likely until late this year.
CONSUMER REMAINS KEY
Deadly bomb attacks on London during the last few hours of the MPC's July meeting and a botched plot two weeks later had also boosted calls for a rate cut to shore up confidence, although so far they don't appear to have damaged the economy.
The BoE made no mention of the bombings in its statement.
The economy was slowing long beforehand, led by a slowdown in consumer spending as the housing market has cooled following five interest rate hikes between November 2003 and last August.
"Although there are some signs of a pickup in consumer spending, downside risks remain in the near term," the BoE said in its statement.
Economic growth slipped to its weakest pace in 12 years in the second quarter and even the labour market, while still in good shape by historical standards, appears to be on the turn.
Some analysts doubt that household spending was likely to improve in the near term, despite an unexpectedly strong 1.3 percent jump in June retail sales.
"We don't see any significant signs of any likely improvement in activity. Consumer spending is still weak, manufacturing is in recession and that is likely to spread to the service sector," said James Knightley, economist at ING Financial Markets. "I think they will need to do more".
But others had questioned the need for a move now following the pound's sharp fall and the fact that inflation is currently at the MPC's government-set target of 2 percent.
Melanie Baker, economist at Morgan Stanley who was one of a handful of city analysts who forecast rates would remain on hold called the cut "largely precautionary."
"Recent data does not justify a series of rate cuts, in our view. Further, the risk of re-igniting the housing market and further ramping up household debt levels mean that this rate cut is unlikely to mark the start of a series of cuts," she said.
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