BOE Holds Interests Rates

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BOE Holds Interests Rates
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Posted by: forwardone

Bank of England voted 8-1 to hold rates

Wednesday January 23 2008

This article was first published on guardian.co.uk on Wednesday January 23 2008. It was last updated at 10:23 on January 23 2008.

Minutes from the Bank of England today showed that the decision to keep rates on hold at 5.5% was only opposed by one MPC member, reinforcing expectations that Britain is unlikely to follow the US lead in cutting interest rates aggressively.

However, economists are still pencilling in a quarter-point cut in February as policymakers are clearly worried about slowing growth. Official data today showed UK growth eased slightly in the last quarter of 2007, but was still above City forecasts.

Only dovish monetary policy committee member David Blanchflower voted for an interest rate cut in January while the other eight policymakers wanted no change, arguing that the outlook for inflation in the short term had "worsened markedly".

While the MPC acknowledged that the economy was likely to slow this year since its last forecasts in the November inflation report, there was concern that price pressures in the economy were persisting.

"For most members, no change in the Bank Rate was necessary this month," the minutes from the January 9-10 meeting said. "A second period during which inflation was significantly above target so soon after the one in Spring 2007, might be more likely to lead people to revise up their expectations of future inflation."

The voting breakdown was more hawkish than the City expected. Analysts had predicted a 7-2 vote in favour of unchanged rates.

The minutes provided another sign that the Bank is unlikely to follow the US Federal Reserve in cutting interest rates aggressively. The Fed slashed borrowing costs by 75 basis points in a surprise emergency attempt to rescue the ailing US economy.

This was hinted at last night in a speech by the Bank of England governor, Mervyn King, who said that inflation was still the MPC's main concern.

He added the volatility facing the world economy and Britain at the moment was "necessary adjustment as the imbalances - between spending and saving and between domestic demand and trade - unwind".

However, the minutes did little to alter expectations that interest rates in the UK will come down, albeit more gradually. Economists are still pencilling in a quarter-point cut in February as policymakers are clearly worried about slowing growth.

Blanchflower argued that the US outlook has materially worsened, meaning the risk of a sharp and persistent slowdown in Britain had increased.

He added there was little sign that wage bargainers would seek higher pay and thought an immediate rate cut was warranted.

The others felt a cut was inappropriate at a time when the decline in sterling against most other currencies was already acting as an effective monetary easing.

Blanchflower's fears of a slowdown were reflected in figures from the Office for National Statistics today. They showed that growth in the last three months of 2007 eased to 0.6% from 0.7% in the previous quarter. This was the lowest quarterly growth rate for over a year.

However, this was slightly stronger than the 0.5% which economists had expected. The final quarter figures left 2007 with the strongest full-year performance since 2004.

However, the data revealed dark clouds on the horizon for Britain with a slowdown in the service sector, which forms three-quarters of the economy.

The main driver for this was a slowdown in business and financial services growth. The sector recorded the weakest quarterly growth since the second quarter of 2003 in a sign that the credit crunch has harmed activity.

The broad service sector grew 0.7% on the quarter, compared to 0.8% in the previous three months.

"(The data) underlined the fact that the UK economy is slowing from a strong starting position," said Jonathan Loynes at Capital Economics. But he added that the data and minutes have both been overtaken by recent events.

"Interest rates are very likely to fall in February. What's more, we still think they will go lower (to 4%) than most forecasters expect. Nonetheless, the pace of monetary loosening in 2008 still looks likely to be relatively slow – perhaps one cut per quarter – as the MPC grapples with rising inflation."

Guardian.co.uk