4 June 2001, 14:37  OUTLOOK BoE's MPC to keep rates at 5.25 pct on Wednesday, but may ease in July

---- by VICTORIA MAIN ----
LONDON (AFX) - The Bank of England's monetary policy committee is expected to leave rates at 5.25 pct at the conclusion of its monthly meeting on Wednesday, the day before the election, according to economists.
Economists predicted the MPC may decide in July to make its fourth rate cut this year as a cushion against the U.S. slowdown. They said the election in itself will not preclude a rate cut but added that the relatively robust state of the UK economy means there is no urgent case for further monetary easing.
"In a nutshell, I think that the MPC has had enough justification from domestic numbers to pause in cutting interest rates," Bank of America economist Jeremy Hawkins said.
"There's been a modest acceleration in RPI-X but it's still below the 2.5 pct target, the average earnings figures were again disappointingly firm, and from the consumer sector, there've been strong retail sales and record borrowing," he said.
"If you put all that together plus the fact that consumer confidence appears to have gone up in May, it does mean that they could cut interest rates again, but there's no immediate pressure on them to do so," he said.
Credit Suisse First Boston economist Robert Barrie agreed that the economic situation does not warrant an imminent rate cut. "There probably won't be a reduction on Wednesday because I don't think the balance of the evidence suggests that we need a change just yet," he said.
"We've had reasonably robust domestic numbers such as the labour market where there was a further fall in unemployment and average earnings numbers fell back but not quite as far as they might have done," he said.
"The last retail sales number was also quite strong, and consumer credit and consumer confidence numbers are going up rather than down. So that whole picture of domestic demand seems reasonably steady," he said.
Barrie acknowledged that "one or two less positive signs such as a weak purchasing managers index, the Confederation of British Industry industrial trends survey which wasn't strong, and the latest industrial output numbers could concern the MPC" but he does not expect them to justify a rate cut before July.
Investec economist Philip Shaw too is expecting the MPC to opt for the status quo on Wednesday.
"We're expecting no change. Principally, the reason is that the MPC has cut rates three times this year, resulting in 75 basis points of easing, and looking at the current indicators it's fairly clear that domestic demand growth remains robust," he said.
"So, there isn't, to our mind, an urgent case for cutting rates again," he said.
Barclays Capital economist David Hillier sees a 90 pct chance that rates will stay on hold and a 25 pct prospect of a 25 basis point cut. "Most of the key data released since the MPC last met have been a touch firmer than expected," he said in a research note.
As for the timing of the election, Bank of America's Hawkins said that this is a disincentive for a cut on Wednesday.
"Although the MPC has downplayed the significance of the timing of the election, it must be reluctant to come out and lower the cost of borrowing just a few hours polling booths open," he said.
Investec's Shaw agreed that the MPC would make a pre-election cut if it had to, "it would feel that it would be somewhat impolite to cut rates the day before a nationwide poll".
CSFB's Barrie said that "while the election does not make a huge difference, it's very difficult to argue that the election makes no difference at all".
He said however that he believes it will have little impact on the MPC's decision.
Economists predicted the MPC will probably cut rates in July if it deems further easing necessary.
"Quite possibly they will act in July," Barrie said.
"I'm torn between thinking this might be the low point for rates and between thinking that there is one more cut to come. If there is another to come, it has to be reasonably quickly because I do hope that in the second half of the year that we'll see a slightly stronger international background," he said.
"If we have an improved international situation and the domestic economy is doing just fine, just above 5.00 pct will probably look appropriate," he said.
Barclays Capital's Hillier was also unsure if the MPC will ease monetary policy further.
"Further out, we still have a final 25 basis point cut factored into our forecasts - partly because the MPC usually makes one cut too many," he said.
"But if the domestic data continue in their recent vein and the international situation doesn't deteriorate further, we won't get another reduction," he said.
However, Investec's Shaw said a July cut looks almost inevitable. "It's fairly clear from the minutes of the MPC's meeting in May where members seriously contemplated a cut of 50 basis points and from the BoE inflation report where the risks were tilted towards continuous undershooting of the inflation target that the bias remains very much on the downside".
He added that sterling's current strength makes for "a fairly clear recipe for another cut in base rates in due course, probably in July". Economists noted that the MPC's newest member, former CBI chief economist Kate Barker will be attending her first meeting on Wednesday as successor to industry darling DeAnne Julius, a leading dove. "Most analysts think this is a like-for-like swap - one arch dove for another," Barclays Capital's Hillier said.
"This has never been our view. All of the evidence suggest Ms Barker is a pragmatist with slight dovish tendencies. We would be very surprised indeed if she turned out to be a 'crusading dove' in the mould of Ms Julius," he said.

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