Odds shorten on early interest rate cut

Published on Saturday 5 January 2008 15:18

THE odds on the Bank of England cutting interest rates for the second time in two months are shortening, as fears over the health of the economy catch up with worries about inflation.

Economists believe the bank's decision will be close after viewing data on falling house purchases and scaled-back economic growth forecasts, which would point to a rate cut. Those statistics will be stacked against evidence that wages are rising fast, building up inflationary pressure, which would make it harder to cut the base rate from 5.5%.

Mike Lenhoff, chief strategist at Bell Lawrie, predicted an early rate cut – possibly this week – to be followed by two more this year, so that the UK would go into 2009 with base rates at 4.75%. "The Bank of England is concerned about inflation, which is why interest rates are currently high in relation to the past couple of years," Lenhoff said. "However, emerging worrying factors may tip the balance slightly, and may lead the (bank's] monetary policy committee to announce a cut on Thursday."

Some economists have cut their forecasts for UK growth this year to as low as 1.8%, compared to between 2.5% and 3% before the credit crisis.

But the picture was complicated by a report from the Chartered Institute of Purchasing and Supply on Friday showing that growth in service industries picked up last month. And Incomes Data Services said annual pay settlements in the three months to January rose to 4% from 3.4% in December.

The British Retail Consortium's figures for last month, out on Tuesday, could play a significant role in determining the MPC's course of action.