BoE's Lomax suggests she may be leaning towards rate cut
Thu, Nov 22 2007, 21:55 GMT
afxnews.com
HULL (Thomson Financial) - Bank of England rate setter Rachel Lomax today underlined the uncertainty facing the path of UK interest rates but also signalled that she may be leaning towards a pre-emptive rate reduction.
"We can, and should respond quickly and flexibly to early signs of the changing economic weather," she said in a wide ranging speech to businessmen here today.
But gauging the weather has become a tough task, she said, continuing the metaphor.
"According to most recent official economic statistics, the weather is still set fair. But we know fouler weather is brewing offshore. What is still far from clear is whether we are in for a force 6 strong breeze or a full force 8 gale."
Against this backdrop, she said upcoming economic data will take on added importance.
"We need to be very alert to the risk that the economy may be slowing too abruptly. At current interest rate levels, monetary policy may be on the restrictive side," she said.
At the rate setting panel's meeting earlier this month, Lomax voted with the majority to keep the UK base rate unchanged at 5.75 pct. But while she did not opt for a cut then, the majority appear to have been simply biding their time before delivering a reduction.
Today, Lomax identified some key uncertainties facing the UK. Firstly, whether the tightening in liquidity conditions will lead to a full scale credit crunch. Secondly, how consumers will respond and thirdly just how long any impact of the first two uncertainties will last.
While consumers appear to be in a relatively string position, tightening credit conditions "should act as a brake on consumer spending and investment," she said.
Still, the size of this effect is highly uncertain, she stressed, adding that much will depend on how far recent developments dent future confidence although so far that does not seem to have happened.
She also noted that the current problems in the credit market may have wider, long term implications.
"My guess is that over the next 3-5 years, we will see a sustained -- though not necessarily complete -- reversal in these trends, as banks re-appraise the risks around certain business models and complex financial instruments," she said.
On the other hand, higher energy prices are driving inflation higher, she said, citing crude oil prices which are nearing the 100 usd level. She also made one key observation -- that she and other rate setters were reluctant to lower rates in 2005 even as the economy was slowing because oil prices were also surging then.
And, highlighting the dilemma facing rate setters, Lomax said: "There are always risks in signalling that policy will be eased, at a time of rising energy prices. This is all the more after a year when inflation has been above target and on some measures remains uncomfortably high."
sivakumar.sithraputhran@thomson.com
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