Bank of England May Reduce Rate for First Time in Two Years

[HenryTo]

A rate cut is now imminent in the UK. Industries and housing market have been slowing down despite a M-4 growth rate of 11% year-over-year in June:
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Bank of England May Reduce Rate for First Time in Two Years
Aug. 4 (Bloomberg) -- The Bank of England may reduce its benchmark interest rate for the first time in more than two years today after the U.K. economy grew at the slowest annual pace since 1993 in the second quarter, a survey of economists showed.

The nine-member Monetary Policy Committee will probably lower the repurchase rate by a quarter point to 4.5 percent today, 35 of 40 economists in a July 29 survey by Bloomberg predicted. The London-based bank last pared the rate in July 2003 and has set it at 4.75 percent, near a four-year high, for the past 12 months.

Higher borrowing costs, oil prices above $60 a barrel, stagnant house prices and rising unemployment are sapping consumer spending, which has fueled 52 straight quarters of growth in Europe's second- biggest economy. Gross domestic product grew 1.7 percent in the second quarter from a year earlier compared with 2.1 percent in the previous quarter, the government said July 22.

``The rate cut is fully priced in,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London who expects the first of two quarter-point reductions today. ``The debate now is whether the bank needs more aggressive rate cuts, taking the base rate to below 4 percent, or whether interest-rate easing will be more modest.''

U.K. borrowing costs are the highest among the Group of Seven richest nations after the Bank of England raised the repurchase rate five times between November 2003 and August 2004. The central bank's decision to hold rates on July 7 was carried by a margin of one, with four members of the rate-setting panel voting for a cut.

Business Hurts

Ninety-seven U.K. companies trimmed their earnings forecasts in the second quarter, the most warnings in a quarter since 2002, Ernst & Young LLP said in a study on July 18. London-based Marks & Spencer Plc, the nation's biggest clothing retailer, said on July 13 sales at stores open a year or more fell for a seventh quarter. Nottingham, England-based Boots Group Plc, the largest drugstore operator, on July 21 reported a second consecutive quarter of declining sales.

Slowing growth may help pare inflation, which reached 2 percent in June, the central bank's target. The economy may expand 2 percent this year, the National Institute of Economic and Social Research, which advises the bank and the Treasury, said July 29.

That forecast is less than the 3 percent to 3.5 percent predicted by Chancellor of the Exchequer Gordon Brown and the 2.6 percent projected by the bank in the May Inflation Report.

Inflation Report

Deputy Governor Rachel Lomax noted in a speech earlier this year that almost two-thirds of rate moves since 2001 have come in the same month as the quarterly Inflation Report is published. The next report, which will contain forecasts for growth and consumer- price inflation, is due for release on Aug. 10, heightening expectations of a shift in rates this week.

``The bank will have more information from the Inflation Report,'' said George Buckley, an economist at Deutsche Bank AG in London. ``We are going to see them doing two things in that: trimming their growth forecast and possibly also trimming their inflation forecast. All this points to lower rates.''

Buckley says there is an 80 percent chance of a cut today and predicts another one in November, also an Inflation Report month.

The implied rate of the interest-rate future maturing in December closed at 4.43 percent yesterday, down from 5.21 percent on March 2, its high this year. Investors have pared expectations of more than one rate reduction this year over the last month though. On July 4, the implied rate closed at 4.31 percent.

A government report tomorrow may show industrial production, which accounts for more than a fifth of the economy, failed to grow in June after increasing just 0.1 percent in May, the median of 37 estimates in a Bloomberg survey showed.

Industry Recession

The government said on July 22 that industry slipped into recession in the three months through June after production fell for a second quarter amid sluggish sales to the euro region. Until the end of last year growth among the dozen nations sharing the euro has lagged the U.K. pace in every quarter since 2000.

A survey of purchasing managers on Aug. 1 by the Chartered Institute of Purchasing & Supply showed manufacturing shrank for a fourth month in July, suggesting the weaker operating conditions in the second quarter persisted at the start of the third.

Sustained growth in services, which account for almost three- quarters of the U.K. economy, may reduce the chance of further rate cuts, some economists said. Another survey of purchasing managers compiled by NTC Research for CIPS showed growth in services gathered pace for a second month in July, easing concerns about the consumer spending slowdown filtering through.

``The resilience of the service sector supports our expectation that the MPC will be in no hurry to engage in further monetary loosening following this month's expected cut,'' said Richard McGuire, an economist at Royal Bank of Canada in London. He expects rates to remain at 4.5 percent until February 2006.

Six of 16 so-called primary dealers in U.K. government debt surveyed by Bloomberg last week forecast the central bank will cut its benchmark rate just once this year. Two said policy makers will leave them unchanged.