Bank of England Hints at Rate Cut

The latest minutes of the BoE's monetary policy committee have observers predicting a rate cut by yearend

A glimmer of hope for hard-pressed businesses and homeowners emerged from the latest minutes of the Bank of England Monetary Policy Committee (MPC)—with some observers predicting a cut in interest rates by the end of the year as inflation eventually subsides. It came on a day of yet more gloomy news on the economy,

At its last meeting, the MPC voted by seven to two to keep rates on hold at 5 per cent, with one member, Tim Besley, voting for a quarter percentage point rise and another member, David Blanchflower, opting for a quarter percentage point reduction, as he has for some months.

This three-way split repeats the pattern seen in July, but observers detected there was more thought given this time to the merits of reducing rates immediately. While balanced, the minutes welcomed signs that inflationary pressures were easing—especially the 15 per cent fall in the oil price. The MPC was also encouraged by the muted level of wage settlements and inflationary expectations.

David Page, an economist with Investec, said: "The seemingly softer tone to the Committee's discussion, in keeping with a more muted outlook in the Inflation Report, does seem to have pretty much ruled out any prospect of a rate hike (which was already slim) as it would risk an 'unnecessarily deep' downturn."

Amit Kara, of UBS, said: "Although we envisage the first rate cut next year, there is every chance that the MPC begins to cut as early as November, especially if commodity prices continue to fall and economic activity falters, as expected."

Evidence that the economy is indeed faltering mounted yesterday. The Bank's own Agents Survey, drawing on impressions from regional representatives, noted that "concerns about demand were a more important factor in restraining investment than restrictions in the supply of credit, although credit was becoming harder to obtain". Consumer spending on "big ticket" items, such as televisions and cars, and on eating out is being hit especially badly.

The CBI added to the downbeat mood as its Industrial Trends Survey put business sentiment at a seven-year low. Nor was there much cheer from the beleaguered housing market: the Council of Mortgage Lenders announced gross lending for house purchases running 27 per cent lower than it was a year ago.

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