1 October 2001, 17:26 OUTLOOK BoE leaning towards 25-point rate cut despite strong UK data
LONDON (AFX) - The Bank of England's Monetary Policy Committee is
expected to cut rates by 25 basis points on Thursday at the conclusion
of its monthly meeting, despite this week's strong housing data and
better-than-expected manufacturing sentiment, economists said.
They said that with the global environment so uncertain and the
outlook for growth and consumer demand so unclear, that the MPC will
err on the side of caution and cut by 25 basis points.
However, economists said the decision is likely to be close and is
not a foregone conclusion, and will in part be influenced by the extent
of the Federal Reserve's expected easing tomorrow.
According to AFX News' consensus estimates, economists expect a 25
basis point cut.
"There is an argument that the strength of domestic demand coming
from both the consumer and public sectors, and the disappointing
inflation data mean that UK rates should stay put," John Shepperd,
global economist at Dresdner Kleinwort Wasserstein, said.
"The recent upward revisions to GDP for the second quarter (and
earlier) will have strengthened the case. Also, there could be a bias
to waiting until the forecasting round associated with the quarterly
Inflation Report in November," he added.
"Nevertheless, we do expect the deterioration in the international
environment to win the day, and expect to see another 25 basis point
reduction in base rates announced on Thursday," Shepperd said.
Steven Major, a gilt analyst at HSBC, said the BoE has its eye on
domestic pressures.
"Does the global risk outweigh domestic strength?" he asked.
"Our view is that they will cut by 25 basis points regardless of
the domestic situation as a precaution or insurance against a consumer
sentiment slowdown."
"If euro zone data is weak then that will be a good rationale for
cutting. The BoE will watch the euro zone and US data as closely as the
UK," Major said.
"The biggest risk is if the US Federal Reserve doesn't cut by
another 50 points on Tuesday, but if they do then the BoE will cut by
25 basis points," he added.
Peter Dixon, an economist at Commerzbank, said the decision to cut
will be tight but that a 25 basis point cut is likely.
"In view of trends in the global economy we look for the MPC to cut
interest rates by 25 basis points this week as a precautionary measure
against a sharp deterioration in confidence, even though the UK economy
up to now has remained buoyant. However, the decision will be very
tight," he said.
Michael Saunders, an economist at Schroder Salomon Smith Barney,
said Monday's strong UK data has tilted him from the 'yes' towards the
'no' camp.
"In light of the past week's gains in equities and modest drop in
consumer confidence, I was looking for a 25 basis point cut. But they
probably won't as the Purchasers Managers Index was stable and house
prices are surging. So I'm leaning towards a 'no' as things stand," he
said, adding that he is not convinced either way.
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