Economists forecast cut in rates

BBC News - Wednesday 6th of February 2008

UK interest rates are expected to be cut from 5.5% on Thursday during the latest meeting of the Bank of England.

Analysts say the Bank is likely to bring down the cost of borrowing on Thursday, but borrowers shouldn't expect drastic cuts in rates.

It is widely predicted the Monetary Policy Committee (MPC) will trim rates by a quarter of a point to 5.25%.

But it is thought concerns over rising inflation will stop the MPC making the type of deep cuts seen in the US.

The rate decision comes after the British Retail Consortium on Wednesday said shop price inflation picked up in January to 1.2%.

Balancing act

Food prices showed the biggest increase, up 3.9% compared to the previous year.

Two other reports this week showed that the economy is holding up.

The services sector showed a slight increase in growth in January, while the Halifax reported that house prices were unchanged last month.

"Latest data and survey evidence indicate overall that while UK growth is currently clearly slowing appreciably, it is not collapsing," said Howard Archer, chief UK economist at Global Insight.

"Consequently, the Bank of England seems unlikely to follow the US Federal Reserve in slashing interest rates.

"Instead, the Bank of England is likely to cut interest rates gradually but steadily."

Rapid steps

UK business is looking for a more aggressive attitude to interest rates.

Economic adviser to the British Chambers of Commerce, David Kern said: "We would welcome a cut to 5% but we understand the MPC may be reluctant to give a misleading impression of panic.

"We urge the MPC to move to a 5% rate in two rapid steps.

The longer it waits, the bigger the danger that the situation could deteriorate."

The MPC voted 8-1 to keep interest rates on hold in January, and said the risk of inflation had "worsened markedly".

Although the most recent UK inflation data showed that inflation remained at 2.1% for the third month in a row during December, energy prices have increased substantially since then.

Exchange rates

British Gas, Npower, EDF and Scottish Power have all announced double digit increases in fuel prices this year.

Policy makers will also be keeping on eye on the pound.

It has fallen 7% against the dollar since November and was down again on Wednesday.

A strong currency helps keep inflation low by making imports relatively cheaper.

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