Will the BoE Cut Rates?


Since last year's interest rate hike cycle, UK's Monetary Policy Committee has already reduced the official interest rate during two occasions. But will the MPC cut again this Thursday?

Current market expectations call for a 25bp rate cut since an injection of liquidity may be needed as the UK economy is significantly slowing. In fact, in Q4 of 2007 household spending growth and investment demand have decreased more than expected. Also, U.K. consumer confidence slipped to the lowest level in more than three years prompted by higher energy and food prices. Moreover, previous rate cuts haven't brought any effect. House prices are still falling, the supply of credit is tighter and mortgage rates haven't decreased. 
 
However, this rate decision is hard to call. Beyond growth concerns, the Bank of England needs to consider other factors like inflation and weakening of the sterling exchange rate. Consumer price inflation rose sharply to a nine month high in February and higher oil prices and higher import costs, resulting from a weaker pound, are expected to drive inflation further above target over the coming months. Indeed, the British pound has fallen by over 10 percent in trade-weighted terms since last summer to its lowest level since early 1997.


Anna Fedec, analyst@tradingeconomics.com
4/7/2008 12:50:36 PM