BoE Keeps Interest Rate Unchanged


The Bank of England kept its key interest rate unchanged today as policy makers assess the effect on the economy of higher corporate borrowing costs and a run on lender Northern Rock Plc, a survey of economists shows.

The decision is the first since the bank loosened lending standards to shield the economy from a jump in money-market rates and panic among depositors at Northern Rock. The run on the bank, the first in more than a century, clouded the outlook for economic growth and inflation, and prompted Britain's chief business lobbyist to liken the country to a ``banana republic.''

``Given problems in the money market and risks to growth, you're not going to want to raise rates, but there's not a single indicator that would make a strong case for a rate cut,'' said Grant Lewis, an economist at Daiwa Securities SMBC Europe, who formerly worked at the U.K. Treasury. ``We see rates on hold until the middle of next year.''

The benchmark rate at the Bank of England, led by Governor Mervyn King, is the highest among the Group of Seven industrialized nations. The Fed cut its benchmark rate by half a percentage point to 4.75 percent on Sept. 18, saying tougher credit standards may hurt growth. All but one of 55 economists surveyed predict the European Central Bank will keep its key rate at 4 percent at 1:45 p.m. today in Vienna.

Inflation Risks

U.K. policy makers unanimously kept their rate unchanged on Sept. 6, saying that inflation risks have ``probably receded'' even though the impact of financial-market turmoil on the economy ``was still very unclear.'' Inflation slowed to 1.8 percent in August, the lowest level since March 2006 and below the central bank's 2 percent target for a second month. The bank is not scheduled to publish a statement with its rate decision.

U.K. house prices, which have surged 18 percent in the past two years, fell for the first time in nine months in September, declining 0.6 percent from August, a report from HBOS Plc showed today.

Northern Rock, the U.K.'s fifth-biggest mortgage lender, last month asked the central bank for a loan to help it weather the credit slump, and only a government guarantee ended the subsequent run on deposits on Sept. 17. Former policy maker Richard Lambert said Sept. 26 that ``outside movies, a run on a bank is something that happens in a banana republic.''

Election Ahead?

The crisis is still fresh in voters' minds as Prime Minister Gordon Brown considers calling an election by the end of the year to take advantage of his lead in opinion polls.

King has drawn criticism for not doing enough to help banks struggling with the surge in overnight and three-month lending rates. He abandoned his opposition on Sept. 19 and loosened the central bank's lending standards.

A survey of U.K. banks shows they are poised to reduce the supply of credit to companies ``significantly,'' the Bank of England said Sept. 26. Borrowing costs have also risen after five rate increases by the central bank over the past year.

``The tightening up of credit conditions we're seeing for households and businesses as a result of recent credit problems will transmit itself into a slowing economy,'' said Neil Mackinnon, chief economist at London-based hedge fund ECU Group Plc, and a former U.K. Treasury official.

The pound fell today on speculation signs of slowing growth may prompt the central bank to cut interest rates in the next six months. The currency traded at $2.0314 at 10:00 a.m. in London, down from a 26-year high of $2.0654 on July 24.

Money Markets

Money-market rates have eased over the past week. The three-month London interbank offered rate, or Libor, for pounds fell to 6.24 percent yesterday, the lowest since markets seized up on Aug. 9. The rate touched an eight-year high of 6.9 percent on Sept. 11.

The U.K. economy grew 3.1 percent in the second quarter from a year earlier, faster than previously estimated, a government report showed on Sept. 26. The economy will expand 2.9 percent in 2007, the most in three years, the International Monetary Fund predicted July 25.

Inflation P...


Bloomberg
10/4/2007 6:57:16 AM