The BOE's Fears Point to Gloomy 2008
Gloomy signals for the economy continued to mount yesterday as the Bank of England revealed that its Monetary Policy Committee voted unanimously for an interest-rate cut while fresh data pointed to a downturn on the high street and in the housing market.
In a sign of the Bank's concern about the economy, the MPC voted 9-0 for the quarter-point cut two weeks ago. The reduction was the first for more than two years, and the committee's first unanimous vote for a cut since the aftermath of the 9/11 attacks in 2001.
The MPC's minutes, published yesterday, said: "The worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term."
The minutes fueled expectations of another cut as soon as January as the Bank tries to keep the economy afloat in the face of a squeeze on lending by banks. The MPC has to weigh the risks of a severe slowdown against the threat of inflation if it makes the cost of money cheaper.
But the committee said it could "act pre-emptively" against tightening credit conditions without encouraging price rises and high wage demands.
Alan Clarke, UK economist at BNP Paribas, said: "Far and away the biggest concern is an undesirably sharp slowdown in the economy. This flags the possibility of a January rate cut."
The MPC's minutes coincided with downbeat news from the key retail sector.
The MPC considered a bigger cut at the meeting but decided against because of the risk of inflation.
The Bank's Governor, Mervyn King, known as one of the committee's chief inflation "hawks", has repeatedly warned about the threat to the economy of banks' unwillingness to lend for consumption and investment. The concerted action by central banks to inject three-month liquidity into the system is designed to ward off global recession, he said on Tuesday.
Retailers are pinning their hopes on a late spending surge after recording the weakest sales growth in over a year during the first fortnight of the build-up to Christmas, the Confederation of British Industry said.
A third of companies had less money going through the tills, while 42 per cent saw rising sales—the worst result since November last year, and the fourth month in a row that sales growth had disappointed. Shoe and book sellers suffered particularly badly, while grocers and specialist food stores held up.
Retailers were also downcast about next year, with more expecting year-on-year sales to fall next month than forecasting a rise—the first negative expectation since April 2006.
Howard Archer, chief UK economist at Global Insight, said: "Regardless of whether there is a last-minute surge in Christmas shopping, we expect consumer spending to soften significantly in 2008 as consumers are increasingly pressurised."
Figures on Tuesday showed that consumer prices rose 2.1 per cent in November. The figure was higher than the Bank's 2 per cent target but lower than expected.
The Royal Institution of Chartered Surveyors forecast that house prices would be unchanged next year but said the market could experience short-term weakness as banks tighten their lending to potential buyers. Repossessions will rise to 45,000 from 30,000 this year.