--- by VICTORIA MAIN ---
LONDON (AFX) - Today's surprise interest rate cut by the Bank of England is a sign of its growing concern about the impact of the global economic downturn and the strength of sterling on the UK, economists said.
Against expectations, the MPC cut the repo rate by 25 basis points to 5.0 pct in its fourth cut this year. It cited "weaker-than-expected" figures for the world economy and "the persistent strength of sterling" in its accompanying statement.
"This cut has come completely out of the blue and goes totally against what to date has been a very clear BoE policy of transparency," Bank of America chief European economist Jeremy Hawkins said. "I think it does suggest they are increasingly concerned about the knock-on effects for the UK of the combination of the worsening global economy and sterling's strength," he said.
Credit Suisse First Boston economist Robert Barrie too saw the unexpected decision as demonstrating the MPC's concern about the global economy.
"It also showed the MPC is prepared to act upon its concerns even when there are some aspects of the domestic economy which are quite strong," he said.
"That is useful information, and that is the way they acted three years ago, so perhaps we should have borne that in mind," he said. Investec economist Philip Shaw said the decision showed the MPC is less focused on the strength of domestic demand than is widely held and more concerned about the state of the world economy. Shaw pointed to weakening figures from the euro zone and signs of a fall in US consumption.
BNP Paribas economist Ken Wattret agreed the MPC was "responding to the news since its last meeting, which from a global perspective has been very dire, particularly in the European economies." He said the timing of the cut was a surprise but added that, unlike some of his counterparts, he had been expecting the MPC to ease monetary policy in the next few months in order to cushion the UK economy against the global slowdown.
"The MPC's statement ran very much along the lines of what we thought would probably trigger a rate cut in the next few months, so we're not maybe as flabbergasted as some," he said. "People were saying that the bias is towards higher rates. That wasn't a view that we shared," he said.
As for the likely effectiveness of the latest cut, some economists questioned whether it will provide much of a sustainable boost to the economy.
"Unfortunately for the BoE, I think we're in an environment at the moment in which investors are rewarding central banks who reduce interest rates," Bank of America's Hawkins said. "It's therefore likely that the pound is likely to strengthen on the back of this rather than weaken," he said. "The cut is going to be good news to the extent that it lowers borrowing costs, but I don't think it will be a positive factor for industry in the sense that it's going to improve their competitiveness via the exchange rate." CSFB's Barrie agreed that a 25 basis point cut "doesn't make a huge amount of difference", even if he believes it will support growth. He added: "I would be surprised if we go below this level, so what it makes me feel is that next year's growth number is more secure. I think the idea that rates will rise next year is also more secure." However, Investec's Shaw said that while the cut will do little for the manufacturing sector, it will probably meet the MPC's aim of sustaining domestic demand.
"They acknowledge there's very little they can do to support the manufacturing sector in the face of very weak global demand, but they do also acknowledge that they can offset some of that weakness with stronger growth in domestic demand," he said.
"To that extent, not only the fact that 25 basis points has come off but the fact that it was a surprise will give some boost to domestic demand, notably in the housing market and on the high streets," he said.