24 December 2002, 09:10  Bank of England May Delay Rate Rise Until Second Half of 2003

/www.bloomberg.com/
By Reed V. Landberg
London, Dec. 24 (Bloomberg) -- The Bank of England may delay plans to increase interest rates until the second half of next year as sputtering growth in the U.S. and the rest of Europe drag down demand for exports, investors and economists said.
The U.K. central bank probably will lift its benchmark lending rate in July from a 38-year low of 4 percent. pushing it to 4.5 percent by the end of next year, according to the median forecast of 35 economists surveyed by Bloomberg News. None expects a change when policy makers meet next on Jan. 9.
``Rates are going nowhere for the time being,'' said Keith Wade, chief economist at Schroders Plc, Europe's third-biggest pension fund, managing $170 billion. ``The global economy is weak. They're going to wait for things to improve.''
Europe's second-largest economy is bouncing back from a 2001 slowdown, expanding faster than Germany, France and Italy in the third quarter, while the U.S. recovery is tempered by 6 percent unemployment. The U.K's cheapest borrowing costs in four decades have fuelled consumer spending and the quickest surge in house prices since 1989.
At the same time, U.K. factories are struggling to recover from their worst slump since the last recession in 1991. Manufacturers led by Marconi Plc, which makes mobile phone parts, and Corus Group Plc, the nation's biggest steelmaker, shed 161,000 jobs in the last year.
`Stalemate'
``Rates are at a stalemate,'' said John Butler, a former Bank of England economist now working at HSBC Bank Plc. ``Things are going to remain tough in the economy. But if they cut again, they destabilize the housing market.''
U.K. central bankers have left their borrowing costs unchanged for the past 13 months and failed to match half-point rate reductions by the U.S. Federal Reserve and the European Central Bank in November and December.
Members of the bank's rate-setting Monetary Policy Committee have sent mixed signals about their next step. The committee considered raising rates in June and July then moved closer to a rate reduction in the last three meetings.
Mervyn King, one of the nine committee members and the chosen successor for the bank's governor, Sir Edward George, voted alone for higher interest rates at meetings this summer. In the past three months, Stephen Nickell and Christopher Allsopp, two other committee members, voted for a cut.
`Balancing Act'
``It's a balancing act for the bank,'' said Simon Rubinsohn, chief economist at Gerrard Ltd., which manages 17 billion pounds ($27 billion). ``What happens to rates next depends on what happens to consumers. If we get gloomy statements from retailers after Christmas, sentiment could shift markedly toward a cut.''
Tumbling equity prices renewed concern about the strength of the recovery. The FTSE 100 Index of U.K. stocks has fallen 25 percent this year. German stocks in the Dax index are down 42 percent. U.S. shares in the Standard & Poor's 500 Index are down 22 percent. Investment by British businesses fell to its lowest pace in almost five years in the third quarter.
The bank is also concerned about rising house prices, which George and King have dubbed ``unsustainable'' and will probably make inflation rise above the bank's 2.5 percent target much of next year. And since housing holds about half of consumers' wealth, higher house prices will help underpin consumer spending, which fuels two-thirds of the British economy.
``There's a certain amount of denial that rates should go higher,'' said Danny Gabay, an economist at J.P. Morgan Chase & Co. who also has worked at the Bank of England. ``Nobody knows exactly what the bank is doing. The bank doesn't know either.''
Tumbling Stocks
Six of the economists surveyed by Bloomberg News said another rate cut was likely. None of them was certain of that prediction. Asked to put a percentage on the chance of another reduction, economists' median estimate was 30 percent. The highest was 80 percent and the lowest was zero.
The median forecast was for rates to move higher in July. That reading contrasts with futures markets, which indicate no change is likely until the end of 2003. The yield on the three- month Libor contract maturing in December fell to 4.25 percent yesterday from 4.5 percent a month ago.
In November, the bank estimated inflation would average 2.65 percent next year, above its 2.5 percent target. Inflation has remained below that measure every month except three since March 1999. Most economists said a rate rise is more likely than a cut.
``If we didn't have strength in the housing market, they'd be cutting rates,'' said Adam Chester, an economist at HBOS Plc, the nation's biggest mortgage lender. ``But they're reticent to put rates up until the global economy begins picking up.''

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