---- by Anne Peyrichou ----
LONDON (AFX) - The Bank of England's Monetary Policy Committee is likely to leave interest rates on hold for the third consecutive month at the end of its two-day meeting ending on Feb 7, economists said. Despite further evidence that the world economy may be on the upturn, economists believe central banks are unlikely to start raising rates yet as it is still unclear whether the recovery is sustainable or just related to an inventory rebuild.
Some economists even said the next rate move in the UK could be another reduction. In the UK, economic evidence continues to highlight the two-speed economy with household consumption and indebtedness remaining high but productivity still weak.
While the latest Confederation of British Industry survey revealed that retail sales in January have slowed, economists said a moderation in sales balance was no surprise, especially as December recorded the strongest growth for 14 years.
Nonetheless, the CBI believes there is room for a precautionary interest rate cut as orders prospects and growth were weaker and inflation remains low. But according to Audrey Childe-Freeman, economist at CIBC World Markets, an interest rate cut at this week's BoE MPC meeting is neither desirable nor likely.
"The bifurcated state of the economy was confirmed by recent economic evidence but the answer to imbalances in the economy does not reside in another 25 basis point rate cut," she said. On the contrary, Childe-Freeman added, the risk is that further monetary easing would actually exacerbate those imbalances. Economists pointed out that while imbalances in the economy cloud the path of inflation, lower inflation prospects could lead to deflationary worries.
Moreover, the rate decision comes a week ahead of the MPC's publication of its newest Inflation Report. Most economists anticipate the Bank's inflation report will show RPI-X below target over the two-year forecast period, which in turn could justify further monetary easing to meet the 2.5 pct inflation target.
Childe-Freeman believes that the very subdued price outlook combined with the bank's mounting concerns about rising consumers indebtdeness levels will not translate into an interest rate cut. This was echoed by David Hillier, economist at Barclays Capital, who predicts the MPC will vote to leave rates at 4.00 pct but will still present an inflation forecast that undershoots the 2.5 pct target at the two-year horizon.
"Whatever happens to the repo rates, it will be against a background of new inflation forecast. We think the Committee would not have had its discussion about a possible undershoot of the target if this was not going to be an issue in the Inflation Report," he said. Bank of America economist Jeremy Hawkins also anticipates a no change in rates on Thursday.
He said today's CBI survey, which revealed signs of a slowdown but not so prompt as to produce real worries about the UK falling into recession, is the kind of news that the BoE wants to see. "The Bank is keen to see some kind of slowdown coming through in terms of household spending but clearly given the weakness in international economy, it needs to see domestic demand continue to grow at the kind of pace which would support overall GDP," he said. However, for BNP Paribas economist Juli Collins-Thompson, the fact that the BoE is on track to further undershoot its inflation target remains a point of contention and could lead to a 25 basis point cut. Bank of America's Hawkins believes an interest rate move is unlikely before April.
"If we do indeed see inflation continuing to come down in the second quarter and that coincides with a continued cooling in consumers' expenditure, then there is a very good chance of the Bank cutting again," he said.