LONDON (AFX) - Bank of England governor Eddie George has signalled that the monetary policy may not lower interest rates again this year after the reduction expected next week, economists said.
They said a further rate cut of 25 basis points to cushion the UK economy from falling U.S. growth was a given next Thursday at the conclusion of the MPC's two-day monthly meeting.
But they added that George, who chairs the rate-setting MPC, cast doubt on the prospect of further reductions when addressing the House of Lords committee on economic affairs yesterday.
George told the committee that UK economic growth of just 0.3 pct in the first quarter was unexpected given robust consumer demand and foreign trade. "I was surprised by the weak performance, because demand indicators such as foreign trade and domestic demand had been strong," he said.
The governor tempered his comments however with an observation that the U.S. slowdown had "not been as dramatic as I would have feared" even if there was still "great uncertainty".
JP Morgan economist Danny Gabay said George appeared to be saying that Friday's UK gross domestic product figures were too low rather than signalling ongoing rate cuts beyond next Thursday.
He said George's comments on the U.S. economy were highly significant. "He's saying things have not been as bad as they feared they would be but important indicators remain weak. I would interpret that at the governor saying that things didn't fall off the cliff the way some of my colleagues said it would, but it's not clear that things have bottomed yet either," he said.
Gabay predicted the MPC would cut the repo rate by 25 basis points next Thursday, in its third reduction this year, but he said George appeared to be lowering expectations for further monetary easing. "I would take his comments as signalling he's not of the view that sweeping reductions need be necessary," he said.
Standard Chartered economist Claudio Piron agreed that George's comments on the U.S. had dampened expectations of a series of rate cuts. "They will have the effect of preparing the market for a cut of 25 basis points next week but beyond that I think we're in for a long dry summer," he said.
Bank of America economist Jeremy Hawkins said the governor had put paid to market rumours that the MPC might opt for a 50 basis point cut in response to Friday's low gdp statistics and this week's weak manufacturing output figures.
"He certainly wasn't signalling a 50 basis point cut next week. If that were the case, he would have sounded much more concerned about the situation than he did," he said. "So I think the message was -- yes, they will cut next week, but by 25 rather than 50."
However, Hawkins was loath to see George's comments as ruling out further rate cuts. "We'll really have to wait and see what happens on the U.S. front. I'm still looking at 25 basis points next week and perhaps another 25 in July if we have an election on June 7 as is tipped," he said.