By David Robinson
The Bank of England's Monetary Policy Committee is expected to cut interest rates at its November meeting in an attempt to shore-up faltering business and consumer confidence, analysts said this week.
A recent Market News survey revealed 18 out of 20 economists forecast a 25 basis point repo rate cut at the November 7-8 MPC meeting, which would take rates down to 4.25%, with the remaining two predicting no change.
Latest GDP figures, which showed growth accelerating back to trend in the third quarter, will probably prove to be insufficient to deter the MPC from lowering rates.
Of more pressing concern for the committee will be the sharp decline in business confidence recorded in the most recent Confederation of British Industry survey, analysts said. Also, although consumer confidence has so far only seen a moderate decline, as evidenced by the latest GfK survey for October, fears remain of a more severe downturn ahead.
The Q3 GDP data, which showed economic output up 0.6% on the quarter and 2.2% on the year, was "inflated by the (upward> blip in manufacturing" and growth remains at risk in both the final quarter of this year and the first quarter of next year, Michael Taylor, UK economist at Merrill Lynch said.
The MPC will lower rates because of "the need to support confidence, which has emerged as the new issue in monetary policy," Taylor added.
The MPC has already cut rates six times so far this year, each time by 25 basis points, and analysts believe the MPC will stick to this pattern in November.
Geoff Dicks, senior economist at Royal Bank of Scotland, said the strong GDP data had made it even less likely that the MPC would change its ways and cut rates by 50 basis points, and that by making another small rate cut, the committee could bolster confidence while holding out the prospect of a further cut.
"They are in the business of doing 25 (quarter point rate cuts) little and often to remind us things can only get better," he said.
A rate cut in November will owe more to "downside risks and taking out insurance than with the belief the UK economy will definitely be weak," Nick Kounis at Fortis Bank said.
The global economic slowdown, exacerbated by the fallout from the September 11 terrorist attacks on the US, has ensured that the MPC remains in rate cutting mode, but most analysts think there will be at most one more cut after November.
The Market News survey showed none of the 20 analysts surveyed thought rates would be below 4.0% at the end of the second quarter of 2002, and eight out of the 20 thought they would be at 4.25% or above.
The minutes of the October meeting made clear that at least some members of the MPC were aware that the rate cutting cycle may soon come to an end.
"It should be clear that the committee stood ready to act in either direction going forward; further weakness in the world economy might require additional reductions in interest rates but, if the world economy recovered, it might well be necessary to raise rates to contain domestic demand and past experience suggested that such action might need to be taken quickly," the October minutes stated.
Some economists believe rate hikes could come sooner rather than later, as the effects of the current global turmoil wear thin and the strength of the domestic economy re-emerges.
"By Spring of next year, people will think we were racing (cutting rates) and monetary policy will have to be tightened," Stuart Robertson, economist at Lombard Street Research said.
At the November meeting, the MPC will also be armed with its latest set of inflation forecasts, set for publication in the November 14 Inflation Report. The August inflation report showed the MPC's central forecast was for inflation to stay below the governement's 2.5% target throughout the entire 2 year forecast period.
The November report, which will have to factor in both the stronger than expected domestic GDP and the deceleration in the world economy, may well continue to show inflation lingering below target.
On balance, economists continue to believe rates still have a little way to come down, but after the November meeting, unless there is another substantial downturn in the world economy the chances of more than one more rate cut look slender.