Bank of England

Bank of England May Keep Rate Unchanged After Last Month's Cut

By Brian Swint

Jan. 10 (Bloomberg) -- The Bank of England will probably resist calls for another interest-rate cut today as policy makers gauge the effects of last month's reduction on the economy, a survey of economists shows.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will keep the bank rate at 5.5 percent, according to 40 of 50 economists in a Bloomberg News survey. The rest forecast a quarter-point cut. The bank will announce the decision at noon in London.

Economists predict officials will wait until next month before lowering rates again as banks pare lending, cooling economic growth and deepening a slowdown in the housing market. The bank is weighing those risks against the threat of inflation after oil costs rose to a record $100 a barrel last week.

``There will be concern about inflation even though growth isn't looking that strong,'' said Alan Castle, chief U.K. economist at Lehman Brothers Holdings Inc. in London. ``We see them cutting rates again in February and May.''

The British Retail Consortium, representing 80 percent of stores, and the British Chambers of Commerce, which lobbies for more than 100,000 companies, called for a reduction this month. The retail group's survey of shops showed December sales rose at the slowest annual pace since March 2006.

Sales Drop

``A rate cut is important and 50 basis points clearly would be nice,'' Ian Dyson, finance director of Marks & Spencer Group Plc, said in a Bloomberg Television interview yesterday. The U.K.'s biggest clothing retailer fell the most in at least 19 years after an unexpected decline in holiday sales.

The Bank of England's benchmark rate is the highest among the Group of Seven industrialized nations. The U.S. Federal Reserve has twice trimmed its rate to 4.5 percent. The European Central Bank will keep its benchmark at 4 percent today, all 59 economists in a Bloomberg News survey predict.

The U.K. central bank trimmed its rate by a quarter point in December in the first unanimous vote for a reduction since the aftermath of the Sept. 11, 2001, terrorist attacks. ``Financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity,'' policy makers said in the minutes of the decision.

Loan Squeeze

Banks became reluctant to lend to each other because of concern about losses on U.S. subprime mortgage investments. U.K. banks plan to make fewer loans to consumers and companies in the first quarter, the central bank's quarterly survey on credit conditions showed on Jan. 3.

House prices fell in the fourth quarter from the previous three months, the first drop in seven years, according to HBOS Plc. An index of U.K. services from banks to airlines by the Chartered Institute of Purchasing and Supply fell to a four-year low in November, before unexpectedly increasing last month.

Policy makers predicted in November that economic growth will slow to about 2 percent this year, close to the lowest since 1992, following an expansion of 3 percent last year.

The pound has fallen on expectations of further U.K. rate cuts. Against the euro, the currency shared by 15 European countries that buy about half of British exports, the pound has dropped 9.5 percent since the start of July. The U.K. currency has fallen 6 percent against the dollar since reaching a 26-year high of $2.1162 on Nov. 9.

Wage Restraint

Consumers still have the highest inflation expectations in at least eight years, a Bank of England survey showed on Dec. 13. Prime Minister Gordon Brown called for wage moderation this week as labor unions started a round of annual pay negotiations.

``There's potential for wages to be sticky even as growth slows,'' said Dominic White, an economist at ABN Amro Holding NV in London, and a former U.K. Treasury official.

Inflation stayed above the central bank's 2 percent target for a second month in November. U.K. gasoline prices rose to a record this week after the cost of crude oil reached $100.09 a barrel, and RWE AG's Npower business, Britain's fourth-biggest energy retailer, raised gas prices by an average 17 percent and electricity prices by 13 percent this month.

Money market rates have fallen, easing pressure on the bank to provide additional cash. The London interbank lending rate to borrow pounds for three months fell to 5.68 percent yesterday, the lowest since April 24.

Economists predict the benchmark interest rate will fall by a quarter point in February, when the central bank publishes new forecasts for economic growth and inflation, according to a Bloomberg News survey from Jan. 4. They see another reduction in May, the survey showed.

``There's no urgency to continue cutting now,'' said ABN Amro's White. ``The fall in sterling, pay settlements and rising power prices all suggest that we could see another hump in inflation. It's a very difficult situation for the bank.''