BoE rate cuts in early August?

BoE rate cuts in early August?

	Published : Sun, 26 Jun 2005 13:05 By : Amy Watts Print this Story

As the news from the markets keeps getting gloomier, analysts are pointing towards what could be a rate cut by the Bank of England in early August. This belief that the interest rates would be lowered has become stronger following the release of the minutes of the MPC in which the Bank of England’s chief economist, Charlie Bean, voted for a cut in base rate in June.

Analysts say that this is a strong pointer that the BoE would take the step after the next inflation report comes out in August. The reason for this speculation is the fact that Charlie Bean happens to be closer than any other member on the monetary policy committee (MPC) to the BoE's forecasting model. Analysts say that if he were of the opinion that the rates should be lowered, then it is safe to say that it would indeed be the case.

Added to this mix is the fact that the bank will have to take into account the results of the house price survey from the Nationwide building society and the retailers survey by the Confederation of British Industry, both of which have painted a gloomy picture. Philip Shaw, chief UK economist at Investec Securities, says, "Given their central role in the MPC's deliberations, interest rate markets will be fixated."

In fact Charlie bean was not alone in advocating a rate cut. He was joined by outgoing MPC member Marian Bell who felt that a quarter point rate reduction 'might obviate' the need for a larger cut later. The markets continue to be dodgy and as Geoff Dicks, UK economist at Royal Bank of Scotland, points out, "Early anecdotal evidence, such as John Lewis department store sales, suggests a modest turnaround in sales in early June compared to May, but no fundamental turnaround. Given the low starting point, we look for another modest rise in reported sales to -2 in June -- still a weak outturn and not indicative of any significant recovery on the high street."

However, it would be wrong to assume that the rate cut is a done deal. For as Mervyn King, Bank governor, said in Bradford earlier this month, inflation could keep on rising due to a weakness of consumer spending as well as rising import prices and a tight labour market.

But analysts counter this by telling that the surprise rate cut by the Bank of Sweden last week means that the BoE would have to follow suit. So what will be the scenario if the rates are indeed cut? Analysts say that a rate cut will intensify the problems of corporate pension funds. Consequently, lower yields would mean larger deficits. But there could be a rise in equities and counterbalance this deficit.

In this scenario, it would be a tough call to say if the rate cut is inevitable, I will only venture to say that at the moment, it looks very probable.