---- by Sivakumar Sithraputhran ----
LONDON (AFX) - The Bank of England's Monetary Policy Committee is widely expected to keep its base rate unchanged at 4.00 pct at its two-day monthly meeting ending today, taking a breather after last month's surprisingly large reduction of 50 basis points, according to economists.
However, most economists also acknowledged a small chance that rates may be lowered by another 25 basis points. All 21 economists surveyed by AFX News look for rates to be held, with a 25 pct chance of rates being cut by 25 basis points.
The three-year low recorded in the Chartered Institute of Purchasing Managers manufacturing sector survey and the possibility of further weakness in the service sector equivalent may well pose a threat to the consensus view on this week's rate verdict, they said. Investec economist Philip Shaw said the minutes to November's meeting and the MPC's evidence to the Treasury Select Committee support the view that rates will remain unchanged today.
In particular, the BoE sees fewer dangers of a recession in the current environment. The inflation report indicates that the chance of a recession is just 1 pct, he said.
"While in November Sushil Wadhwani mulled the idea of voting for a 75 basis point reduction, the majority of members saw the choice between an immediate 50 basis point cut or two 25 basis point moves in November and December, suggesting that the committee as a whole felt that 4 pct could be an appropriate level for a while," Shaw said. He warned, however, that this line of thinking may be overtaken by events. For example, October's retail sales showed their first monthly fall for a year and a half, while November's CIPS reports on manufacturing and services might make further grim reading, Shaw said. Deutsche Bank economist George Buckley said the slump in the CIPS manufacturing headline index to its lowest level since the start of 1999, suggests that further rate cuts will be needed, although not until 2002.
Commenting on the BRC shop price and CBI retail sales data, John Butler, economist at HSBC, said the consumer sentiment related data further strengthened expectations that the MPC will hold rates unchanged today.
"In terms of policy, if MPC have shifted to a policy of targeting confidence as the previous set of minutes suggested, then this is a another reason why rates should be left on hold at (today's) meeting," he said.
The latest BRC survey of retailers shows that the value of sales was broadly unchanged in November, in line with the average rate over the past six months. That strength was supported by the CBI Distributive Trades survey, which recovered sharply from its sharp fall in October.
Further, house prices rose strongly in November according to the Nationwide Building Society. Average house prices across the country rose by 0.7 pct on the month, more than reversing the 0.5 pct fall recorded in October.
"We remain optimistic about the immediate outlook for UK consumers. Our view is that greater job uncertainty and rising unemployment will take consumer spending off its peaks, but the fundamentals suggest that for at least the next six months, consumer spending should slow rather than collapse," Butler added.
Further, the details of the CIPS report show that the main reason for the fall arose from a slide in the employment component, rather than new orders or output. In fact, the drop in employment accounted for more than half of the fall in the overall index in this month's survey.
Investec's Shaw believes the principal debate may soon turn towards the relative merits of a pro-active or steady policy. MPC members may well soon need to consider whether to boost confidence by lowering rates again, but also the extent to which these cuts may need to be reversed further ahead when more visible signs of a rebound appear. Ian Stewart, chief economist at Merrill Lynch, agreed with the consensus view that base rates will stay on hold at 4.0 pct, saying that the BoE "will want to wait before cutting rates after November's greater-than-expected 50 basis point reduction".
Economic figures released in the UK in the last month have come in broadly in line with expectations, he said.
Manufacturing, profits, exports and capital expenditure have weakened but consumer data have generally been fairly firm, although the Royal Institute of Chartered Surveyors and the Housebuilders Federation report that the housing market is cooling, he added. Economists at Barclays Capital also expect rates to stay on hold. "The CBI monthly trends enquiry suggested that the weakness in manufacturing could be bottoming-out. In addition, consumer credit grew 1.5 bln stg in October, stronger than the 1.4 bln stg markets expected. Confidence data for November were also stronger in the month," a Barclays Capital report said.
While retail sales fell 0.1 pct in October, the decline arose from the effects of an unseasonally warm October, they said. "If there is a further cut in this rate cycle, we think it will come in January or February. Increasingly, though, this is starting to feel more like a safety-net forecast," they added.