--- by VICTORIA MAIN ---
LONDON (AFX) - Collapsing global equity markets and signs that the U.S. slowdown will seriously harm the UK economy mean the Bank of England will probably bring forward its next rate cut to April, according to economists.
The BoE's monetary policy committee had earlier been thought likely to wait until after the election, expected in May, before reducing the repo rate by 25 basis points for the second time this year.
Until recently, many economists have argued that not only is there no urgency for the MPC to follow up its February rate reduction but that also it will want to avoid any perception of endorsing the government with a pre-election rate cut. This will be the first election since the BoE was granted independence in 1997.
But economists now say the economic case for a rate cut in April is starting to outweigh the political arguments for holding off until after the election.
They cite weaker equity prices worldwide and yesterday's warning from the Confederation of British Industry that the U.S. slowdown could have a more serious impact on the UK than previously thought. JP Morgan economist Danny Gabay said he has revised his earlier view that the MPC did not need to call into question its political autonomy by cutting rates on April 5, the conclusion of its next monthly meeting.
He said growing economic uncertainty in the hitherto robust UK due to falling share prices and the CBI's warning "gives the MPC some cause to act sooner rather than later".
Gabay said the MPC may at its April meeting bear in mind the timing of the election "but the question now is: do those political considerations outweigh the economic arguments for cutting rates next month?"
While political considerations may have had some bearing on the MPC's decision to hold rates steady on March 8, the day after the budget, Gabay said he did "not think that will be the case next month". He even suggested that, despite press speculation of a May 3 election, controversy over the government's handling of the foot-and-mouth crisis may prompt the government to opt for a September poll.
But Standard Chartered economist Julian Jessop argued that the election date is irrelevant.
"I've never bought this story that the timing of the budget or the election is relevant unless you think there's going to be a radical change in economic policy which of course there won't be. As we already know who's going to win there's no reason for the timing of the election to affect the BoE decision," he said.
Investec chief economist Philip Shaw too said a May election would not preclude a rate cut next month.
"I think if an MPC meeting were scheduled to be on an election day, it might be politic not to move rates or to shift the date of the meeting," he said.
"Nevertheless, I think markets are sophisticated enough to realise that the central bank is not moving for political reasons and would judge the central bank's action on the fundamentals," he said. Shaw said the MPC's April decision could be a close call, judging by the minutes for its March 7-8 meeting showing that for most members the strength of consumer spending growth ruled out a prompt move.
"Nevertheless, subsequent to that we not only had equity market turmoil but more importantly there are increasing signs that Europe overall has been affected by the slowdown in the global economy," he said.
"Consequently, to our minds there's a significant risk that the MPC will move in April even if there are a number of factors which could tilt the balance between now and the next meeting, including manufacturing output data for February the morning of the announcement," he said.
Standard Chartered's Jessop agreed that the MPC looks set to cut rates next month to bolster business and consumer confidence. "The basic issue in the whole world is confidence. We think central banks are going to have to continue to cut rates.....in order to restore confidence because otherwise these fears of a global slowdown are going to b self-fulfilling. The central banks need to get ahead of the game and that means that rate cuts need to be brought forward," he said.
"In the UK, the CBI survey is one factor. Another is the weakness in stock markets. But the most important is still the global environment. There are lots of potential troublespots across the whole world, any one of which has the potential to impact on the UK," he said.
"Given that inflation is so low, rate cuts from the Bank of England don't involve any risk but they might be a good form of insurance against the knock-on effects of the slowdown elsewhere," he said.