After A Hike Too Far, An Interest Rate Cut?

Just as in every meeting since February, the monetary powers in Britain left interest rates unchanged at their Sept. 7 meeting. Unlike the past four meetings, however, Bank of England Governor Eddie George likely did not ask Chancellor of the Exchequer Kenneth Clarke to raise rates.

George publicly backed away from his rate-hike campaign in a speech to mortgage lenders on Sept. 12. The shift reflects the economy's weaker tone, which grew 2.8% in the year ended in the second quarter, down from a 3.7% pace in the first and 4.1% in the fourth. Any sector not benefiting from the export boom is in recession.

The third quarter is not starting off well, in part because almost all of last quarter's growth came in inventory accumulation. And businesses are now paring the excess stock levels. As a result, factory output in July unexpectedly tumbled 0.4%. Yearly production rose only 1.3% in July, the slowest pace in 1 1/2 years.

Activity elsewhere is faltering because of the three rate hikes made from September to February, which pushed the base lending rate to 6.75%. Housing starts plunged 21.1% in July from a year ago, and retail sales have fallen off. The Confederation of British Industry's survey showed that more retailers reported declining sales in August than rising sales.

Employment is also suffering. After falling sharply in the previous two years, the jobless rate has hardly moved since April. August joblessness stood at 8.2%, and the annual pace of weekly earnings slowed to 3 1/4% in July, from 3 1/2% in June, a sign of easing inflation pressures.

After their meeting, Clarke dismissed any notion of recession, but he was more upbeat about 1996 than most private economists. George likely remains concerned that inflation is still above the government's target of 2.5% for its preferred gauge: retail prices less mortgage interest. But amid signs of spreading weakness, the odds of a rate cut--perhaps before yearend--are rising.