---- by NINA KOEPPEN---- LONDON (AFX) - UK economists believe that a deteriorating global backdrop will prompt the Bank of England's Monetary Policy Committee to cut interest rates by 25 basis points in February, while concerns about pre-election give-aways in the Chancellor of the Exchequer's March budget fade.
A rate move would bring the Bank's repo rate down to 5.75 pct, ending a 11-month run of no-change decisions by the nine member strong interest rate setting committee.
Investors are less concerned about pre-election giveaways in chancellor Gordon Brown's annual budget, which he is going to present in March, than only four weeks ago.
Fraser Coutts at 4Cast believes that prospects of a U.S.-led economic slowdown and its impact on demand outweigh concerns about a modest fiscal expansion in the UK.
"The case is similar to the U.S. where, in the first place, people thought that Bush's proposed tax cuts were a bit irresponsible. However, many have changed their mind by now, thinking that fiscal easing is probably quite a good thing, given the slowdown in the U.S. economy," Coutts said.
"I think the MPC will cut rates in February and then wait and see how the budget and the general election turns out, before cutting rates again toward the end of the second quarter," he added. The analyst sees UK short term interest rates at 5.5 pct by the end of 2001.
Michael Hume at Lehman Brothers sees a 60 pct chance of an interest rate cut by February and expects the Bank to shed another 25 basis points off the repo rate around May.
However, the analyst cautioned that an unexpectedly quick recovery in the world economy following extensive rate cuts in the first half of 2001 could prompt the Bank to step on the brakes again.
"It is very difficult to tell what is happening in the global economy in a few months' time... Towards the end of the year, a global economic recovery could catch people by surprise, and hence we might see a reversal of the previou s cuts in the UK," Hume said.
"There is also a chance that the stimulative measures of the chancellor's March budget start to take effect around the second half of the year," he added.
The Lehman Brothers economist expects UK interest rates to be at 5.75 pct at the end of 2001.
Economists noted that monetary easing was primarily driven by prospects of a U.S.-led global economic slowdown, while the domestic economy continued to look healthy.
"Mainly the more gloomy global outlook will prompt the Bank to cut rates," Hume suggested.
"However, there are two quarterly surveys of manufacturing business optimism out in the next weeks -- from the CBI (Confederation of British Industry) and BCC (Britigh Chambers of Commerce) -- which might show some signs of the global slowdown having an impact on exports," he added.
The analyst expects the domestic economy to remain vigorous, but warned that there could be "some payback for the surprisingly strong run of domestic data on the cards."
Although the majority of central bank watchers are convinced that UK interest rates rates will come down probably as soon as next month, Geoffrey Dicks at Royal Bank of Scotland does not see a case for policy easing. On the contrary, the analyst believes that rates will be at 6.5 pct by the end of 2001.
"There is not a single reason in the domestic UK context to cut rates... The level of activity and the tightness in the labour market... tells me that -- from a purely domestic standpoint -- things are still at the tight side," Dicks said.
Hence the RBoS analyst believes that base rates stay at current levels for another six months, at least until after the chancellor's budget and the general election, which is pencilled in for May 3. "By the second half of the year, if the economy is still moving ahead rapidly, unemployment is still falling and sterling is a fair bit weaker like it is today, the MPC might even need to raise rates again. Hence, I stay with my view that rates will be at 6.5 pct by the end of the year," Dicks said.
The analyst further noted that -- although it is too soon to judge whether the UK economy will need a stimulus to counteract a U.S.-led slowdown -- tax cuts would be a better and less inflationary means to stimulate demand.
"If it proves to be the case that some relaxation of policy is necessary, a fiscal easing in the budget would put a floor under UK rates and underpin sterling. It would be less inflationary for a given boost to demand. Between now and the budget it will become clearer whether a boost to demand is required," Dicks said.