London, April 5 (Bloomberg) -- The Bank of England reduced interestrates for the second time this year as evidence mounted that aslowdown in the U.S. economy is curbing U.K. growth. The quarter-point cut in the securities repurchase rate took the amountcharged for loans to commercial banks to 5.5 percent, the lowest levelin 16 months. Economists expected the move. The FT-SE 100 Index of U.K. stocks has fallen 10 percent this year,following a decline in U.S. shares. That has eroded the value of people'ssavings. The U.S. buys 15 percent of U.K. exports. With the world'sbiggest economy close to recession, U.K. manufacturers reporteddeclining orders and production in March. U.S. companies are ``postponing or canceling'' any orders they can,said Simon Eccleston, chief executive of Automation Industries Ltd., aBritish maker of factory equipment. By the end of the year, the centralbank will have lowered its benchmark rate to 5.25 percent to revive theeconomy, he predicted. The quarter-point reduction in the benchmark rate was followed bybanks and mortgage lenders. Mortgage rates are now at the lowest levelsince 1965, the year Winston Churchill died and the Rolling Stonesreleased ``(I Can't Get No) Satisfaction.'' A 25 basis-point rate cut on a 100,000-pound loan will erase 15.71pounds ($22.46) a month from loan-repayment costs, according toHalifax Group Plc, the U.K.'s biggest mortgage company. The economic slowdown has forced retailers to keep a lid on prices,leaving the U.K.'s inflation at 1.9 percent in February, below thegovernment's 2.5 percent target for a 23rd consecutive month. Cuttinginterest rates could spur spending and investment, helping to stop theinflation rate from falling.
Pound Declines
The pound fell 0.5 percent against the dollar to $1.4260, following therate reduction. Bonds were little changed. Interest rate futures contracts show investors expect two more quarter-point reductions in Bank of England rates before the end of the thirdquarter. The yield on the contract expiring at the end of September,unchanged today at 4.91 percent, is half a percentage point belowcurrent three-month rates. The central bank today said that it's concerned that falling stockmarkets, a slowdown in the world economy, and the impact of a foot-and-mouth outbreak that has swept the nation's livestock industry, willcurb confidence among consumers and companies. The U.S. Federal Reserve has reduced interest rates three times thisyear, cutting its benchmark rate by 1.5 percentage points to 5 percent.The European Central Bank, the only major central bank not to havereduced rates this year, is likely to cut at its next meeting of policymakers on April 11, analysts said.
Slower Growth
While few analysts see a risk of recession in Europe, reports across thecontinent show slowing growth. The U.K. economy will probably expand2.5 percent this year, down from 3 percent in 2000, analysts said. ``There are stormy waters ahead,'' Digby Jones, head of theConfederation of British Industry, said in a statement. The CBI is theU.K.'s largest employer organization. U.K. service industries grew in March at the slowest pace in sixmonths, a report Wednesday from the Chartered Institute of Purchasingand Supply showed. Retailers reported slowing sales in March, andpredicted further easing in coming months, according to a survey fromthe CBI. Services -- everything from computer consultants to fish-and- chip shops-- account for two-thirds of GDP. Manufacturing, which represents mostof the rest of the economy, eased in March. Indicators ranging fromproduction to orders fell, according to a CIPS survey, publishedTuesday. Falling earnings have persuaded some investors to siphon money out ofthe stock market, investing in dollars and bonds instead. More than 20percent of U.K. residents own shares, compared with 15 percent inGermany and 10 percent in France, so a stock-market slump affectsconfidence more in Britain than in the two largest economies in the euroregion.
Foot-and-Mouth Disease
Another risk for the U.K. economy is the outbreak of foot-and- mouthdisease. Since sick pigs were found at a British slaughterhouse on Feb.20, more than 1,000 cases of the disease have been diagnosed, andmore than 1 million animals have been killed or marked for slaughter.Sections of the countryside are closed to visitors. The disease hasstruck the tourism industry, as well as farming. The disease could slice 9 billion pounds from British GDP this year, andanother 2.1 billion next year, mostly because of lost tourism, accordingto the Centre for Economics and Business Research. Tourismrepresents about 7 percent of GDP; agriculture less than 2 percent. The Bank of England lowered interest rates in February for the first timein 20 months, and then refrained from further lowering borrowing costs inMarch amid concern that falling unemployment may boost wageinflation. Unemployment declined in February to a 25-year low of 3.4percent, and wages rose at an average annual rate of about 4.4 percent. ``There is little sign of any easing yet in the labor market but, despite itstightness, settlements and earnings growth have so far remainedmoderate,'' the central bank said in a statement today, following therates decision. Minutes of today's meeting of the Monetary Policy committee will bepublished on April 18.