London, Aug. 2 (BridgeNews) - The Bank of England cut its key U.K. lending rate by 25 basis points to 5.00% Thursday, citing the threat from the weaker global economy.
The move surprised most economists, who had believed the U.K. central bank would be too concerned about the strength of consumer demand to cut rates, despite weakness in the manufacturing sector. The European Central Bank opted to keep its benchmark interest rate on hold
at 4.50%, a decision that had been widely expected. Concerns about inflation in the 12 countries sharing the euro are seen as an obstacle to lowering rates, despite signs that growth in the region is slowing.
"Indicators of world economic activity have been weaker than expected over the past few months," the Bank of England said in a statement issued alongside its rate decision.
"This and the persistent strength of sterling are adding to the pressures on the externally exposed sectors of the U.K. economy, and at the same time there are signs of weakening investment growth." Retail spending, household borrowing and the housing market remain robust, partly as a result of recent rate cuts, the BOE said. "Clearly they are much more concerned about the international background than we previously thought, while at the same time being more relaxed about the strength of U.K. consumer demand," said David Page, economist at Investec.
"Nevertheless, at 5.0% we would see this as the bottom of the cycle." U.K. rates have fallen from 6.0% at the turn of the year, with the last move a cut of 25 basis points in May. The BOE said its decision would help keep inflation on track to meet the 2.5% medium-term target. The latest inflation and output projections will appear in the Inflation Report, to be published next week. The ECB gave no reason for its rate decision, but economists said the central bank is probably waiting for confirmation of a downward trend in inflation.
"German second-quarter gross domestic product data, which is due at the end of August, should draw some attention, and I think if GDP comes out much lower than expected then the ECB could cut rates on Aug. 30," said Deutsche Bank's Manuela Preuschl.
By the end of September, 92% of analysts see European rates at 4.25% or below and many see the ECB taking rates down to 4.00% or below by the end of the year. The ECB's last rate change was a cut of 25 basis points in May.