Bank of England May Leave Rate Unchanged

[HenryTo]

Bank of England about to announce whether they will cut ST rates or not - even if they don't start lowering rates today, it is almost a given they will lower rates by the time August rolls around.
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Bank of England May Leave Rate Unchanged, Weigh Reduction Later
July 7 (Bloomberg) -- The Bank of England may leave its benchmark interest rate unchanged today as evidence mounts that growth in the U.K. economy, Europe's second-biggest, is slowing, a survey of economists showed. A cut may follow as soon as August.

The central bank, which considered lowering its repurchase rate from 4.75 percent last month, will leave it unchanged at noon in London, according to 39 of 42 economists in a Bloomberg survey. Three expect a rate reduction today and 12 of 25 economists said the bank will lower rates in August.

U.K. growth lagged the euro region for the first time in more than four years during the first quarter as consumers reined in spending and the housing market sagged, government statistics showed last week. With retail sales data on July 5 adding to evidence of a slowdown, pressure is building on the rate-setting committee led by bank Governor Mervyn King to pare rates.

``The bank will have to cut shortly,'' said Holger Schmieding, co-head of European economics at Bank of America in London, who expects a cut as early as today. ``If the evidence is there, why wait? King said that the bank would react if downside risks materialize. The U.K. has slowed significantly.''

U.K. first-quarter economic growth was revised down to 0.4 percent last week, below the 0.5 percent expansion recorded in the euro region. The British Retail Consortium said July 5 that sales in stores open at least a year dropped for a third month in June.

The government's statistics office said yesterday that manufacturing production stalled in May as record oil prices pushed up factories' costs.

Interest Rate Expectations

Signs of weakening growth have prompted bets among traders that an interest-rate cut may not be far off. The three-month interest-rate future contract maturing in December was at 4.34 percent yesterday in London, down from as high as 5.21 percent on March 2. That compares with the three-month London inter-bank rate of 4.70 percent.

Charles Bean, the bank's chief economist, was one of two rate- setters on the nine-member Monetary Policy Committee who favored lowering rates at last month's meeting. He and outgoing MPC member Marian Bell advocated a cut because of slower growth, slack wage inflation and optimism that any inflationary pressures from higher oil prices will be temporary.

Inflation stayed at a seven-year high of 1.9 percent for a third month in May, a government report on June 14 showed.

With consumer spending waning, lobby groups such as the Confederation of British Industry and the British Retail Consortium also pleaded for lower rates. In a speech last night, CBI Director-General Digby Jones said ``the time for action is now.''

August Reduction

Michael Saunders, Citigroup's chief western Europe economist, said in a note on July 1 that the Bank of England will cut the repurchase rate by a quarter point this week, before lowering it to 4 percent by the end of the year. Bank of America and JPMorgan also forecast quarter-point cuts this week.

Economists such as Ben Broadbent of Goldman Sachs aren't so sure, saying the central bank will hold off moving rates until next month, when it revisits its quarterly growth and inflation forecasts. In May, the bank predicted the U.K. will expand at a 2.6 percent clip this year and that inflation will settle around its 2 percent target over a two-year span.

That's no longer realistic, say some economists. Citigroup's Saunders forecasts full-year growth this year of 2.1 percent. Before last week's downward revision in U.K. economic growth, he was predicting 2.8 percent.

``They probably will cut because they're pretty responsive to growth and it looks weak enough for them to do that,'' Goldman's Broadbent said in an interview. ``They almost invariably wait until the Inflation Report. In its economic effects, whether they cut this month or next is immaterial.''

The next Inflation Report is due for publication on August 10. Bank of England Deputy Governor Rachel Lomax observed in a speech earlier this year that almost two-thirds of rate moves since 2001 have come when the Inflation Report is published.

Still, she said that the correlation doesn't imply that moves in the rate are ``tied in any mechanical way to the central projection for inflation.''