By Philip Uglow
LONDON (MktNews) - The Monetary Policy Committee of the Bank of England is likely to cut rates by 25 basis points following its meeting on Thursday, despite the US Federal Reserve's decision to cut by a greater-than-expected 50 basis points this week.
Following recent weaker economic data from both the manufacturing and service sectors and the relatively low level of inflationary pressures, on economic grounds the BOE would not find it difficult to justify a more aggressive easing.
But tactically, the BOE is more likely to stick to the gradualist policy that has been in place now for nearly two years. After all, the MPC has not voted for a move larger than 25 basis points since the repo rate was cut by 50 basis points in both November and December 1998.
As some MPC members have said this year, the UK is not in the same position as the US economy and the policy response needs to be tailored to reflect this.
After the Sept.11 suicide attacks in the US, the ECB followed the 50-bps interest rate cut made by the Federal Reserve, whereas the MPC voted for a smaller 25-bps move.
Moreover, markets are clearly expecting a quarter-point rate cut, and a more aggressive response would risk causing unnecessary alarm about the health of the economy. This message has been made a number of times by MPC members in the minutes of meetings this year.
As noted above, the BOE could justify a larger interest-rate reduction, given recent economic information. Manufacturing output plunged 1.6% on the month in September, the largest monthly drop since 1992. And the latest CBI manufacturing survey for Q3 showed optimism plunging to its lowest level since 1998. Also, the CIPS services index fell to 46.3 in October, a five-year low.
There is also some evidence that the housing market is beginning to turn. House prices fell by 0.5% on the month in October, according to both the Nationwide and Halifax surveys. Mortgage lending and approvals figures also slowed in September, albeit from very high levels.
And latest figures on the job market from the Recruitment and Employment Confederation point to a slowdown ahead.
However, some of this data is clearly overstating the economic slowdown and the differences between survey evidence and the official economic data pose somewhat of a dilemma for the BOE.
Despite the gloom of the survey evidence, official figures showed that GDP rose 0.6% on the quarter in Q3. Although the very weak manufacturing figures for September could lead to a small downward revision, the message remains that overall growth remains relatively buoyant.
The weakness evident in the CIPS survey in recent months points to much softer service-sector growth than the official data suggests. With service-sector output estimated to have risen 0.8% on the quarter in Q3, this is a clear indication that the CIPS evidence is overstating the extent of the slowdown.
The current economic buoyancy stems from the continued rapid pace of consumer spending, which has yet to show any slowdown this year. Tentative signs of an easing in the housing market could point to a slowdown ahead, but other evidence is mixed.
The latest CBI Distributive Trades Survey indicates very weak sales growth in October, with the balance of reported sales dropping to +19%, the lowest since the start of the year and a massive drop from +54% in September.
The CBI survey, though, has been a poor indicator in recent months, and the (slightly) more reliable BRC retail sales monitor points to continued growth in sales, rising to 6% on the year in October from 5.7% last month.
Two final caveats should be noted. First, some members of the MPC will probably favour a 50-bps rate cut on Thursday. Sushil Wadhwani is almost certain to favour a larger move and he could be joined by both Kate Barker and Christopher Allsopp. It is not out of the question that other MPC may favour a break from the steady hand policy seen all year if they judge the global downturn warrants a larger move.
Second, the BOE is due to publish its latest quarterly Inflation Report next Wednesday. A significant downward revision to the growth outlook due to the prospects for the world economy would increase the pressure for a larger move. With oil prices now below $20 a barrel and petrol prices declining, the MPC could judge that with inflation set to drop in the short-term, they have a little more leeway to cut interest rates more aggressively.