From www.thetimes.co.uk

August 04, 2005

Bank cuts interest rates to 4.5%
By Andrew Ellson, Times Online


The Bank of England cut the cost of borrowing for the first time in two years today as it moves to kickstart consumer confidence and revive the flagging economy.


The Bank reduced interest rates by 0.25 per cent to 4.5 per cent after mounting evidence of an economic slowdown.

The decision was widely expected and there was little reaction in the markets with economists looking to next week's inflation report for indications of the future direction of rates.

The City is split over whether today’s move is a one-off or whether the Bank will need to act again amid mixed economic signals.

Recent surveys have shown weakening house prices, falling consumer confidence and a depressed manufacturing sector. Many businesses have also reported a sharp downturn in retail sales while GDP growth has also been lower than expected.

But there has also been tentative signs of a possible upturn in the housing market, with total mortgage lending increasing for the first time while a survey yesterday indicated a buoyant services sector.

The threat of inflation with world oil prices at an all-time high and sterling falling sharply in recent months, might also force the bank to be cautious when cutting rates, according to many economists.

Malcolm Barr, an economist at JP Morgan said the economic situation is not as bad as many in the City fear and that rates will go back to 4.75 per cent next year.

"The US economy looks like it’s shifting gear, global industry looks like it’s shifting gear and to me that means the MPC is in a different position regarding movements in interest rates than it has ever been previously," he said.

But Howard Archer, chief UK economist at Global Insight, believes today’s reduction will be followed by a another 0.25 per cent cut before the end of this year. He forecasts that interest rates will fall to 4.0 per cent by spring next year.

"The below-trend growth of the past four quarters and the prospect of a continuation of this trend in the near term at least will reduce inflationary pressures.

"Furthermore, we do not believe that a modest reduction in interest rates over the coming months would cause the housing market to re-ignite, given that affordability ratios are still very stretched on several measures," Mr Archer said.

John Butler, chief UK economist at HSBC, said the MPC would most likely see today’s move as insurance against a more marked economic downturn rather than the opening of a more aggressive rate cycle.

This would be unprecedented, as the Bank’s decisions on rates have followed two clear cycles since it became independent in 1997.