BoE holds interest rates, cut seen next month

[HenryTo]

Looks like a peak in ST rates in the UK. The Fed is the only one lagging right now - apart from the ECB, of course.
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BoE holds interest rates, cut seen next month
Thu Jul 7, 2005 4:13 PM BST

By Sumeet Desai

LONDON (Reuters) - Interest rates stayed at 4.75 percent for the 11th month on Thursday after four blasts during rush hour killed at least 45 people in London, but economists said a cut next month was now almost certain.

Financial markets had fully priced in a quarter-point confidence-boosting rate cut before the Bank of England's 1100 GMT announcement because of the attacks which Prime Minister Tony Blair called "barbaric".

But economists said policymakers probably wanted to wait for more information before acting. The BoE publishes its quarterly economic forecasts next month.

"The Bank probably judged that a rate cut today would look like a hasty reaction to today explosions," said Ian Stewart, economist at Merrill Lynch. "Today's events suggest that rates will be cut at the August 3 meeting.

Some analysts said there was a possibility of an emergency rate cut such as took place just after the September 11, 2001 attacks on the United States but European Central Bank president Jean-Claude Trichet suggested no such action was imminent.

Trichet, speaking in Frankfurt after the ECB held rates steady, said he had been in touch with both BoE Governor Mervyn King and U.S. Federal Reserve chairman Alan Greenspan.

"At this stage we have no particular information that would be calling for action. If it were the case, you can be sure that we would do that in real time. Again, we are in permanent contact," he told journalists.

SLOWING ECONOMY

Given reports showing consumer spending slowing fast and manufacturing heading toward recession, most analysts had already expected the BoE would end the cycle of rate hikes that started in November 2003 with a quarter-point cut in August.

"Today's decision by the MPC to keep interest rates on hold at 4.75 percent makes a rate cut in August to 4.5 percent almost certain," said Roger Bootle, economic adviser to Deloitte.

Short sterling interest rate futures which had rallied in the wake of the London attacks pared some gains after the BoE decision but were still pricing in a cut next month.

The pound also gave up some of its initial losses after hitting a 19-month low against the U.S. dollar, some six cents lower than a week ago.

The FTSE-100 index of leading shares fell nearly two percent as transport and leisure stocks fell sharply on fears the slowdown in retail spending would extend to services as shoppers and tourists stayed at home.

Some economists worried consumers -- already feeling the pain of five interest rate hikes in the last 1-1/2 years and soaring petrol prices -- might further rein in their spending because of worries about safety.

Shares in British Airways <BAY.L> were down six percent while hotel group Hilton <CCL.L> was down 6.3 percent.

Retailers had already been complaining loudly about the tough times they are facing and several supermarkets have been urging the MPC to act promptly.

"Many businesses will be disappointed that the MPC decided not to cut interest rates immediately," said Ian McCafferty, chief economic adviser at the Confederation of British Industry.

But other economists noted the experience of events like the Madrid bombings in 2004 and September 11 attacks on the U.S. suggested that consumer spending tended to bounce back after initially dipping.