LONDON, July 10 - The Bank of England surprised financial markets on Thursday by cutting interest rates a quarter-point to a new 48-year low of 3.50 percent in a bid to stave off slowing growth. The move followed a half-point cut by the European Central Bank and a 25-basis point reduction by the U.S. Federal Reserve last month. Twenty eight out of 44 economists polled by last week had predicted that the BoE's Monetary Policy Committee would leave rates on hold this time due to a strong improvement in the service sector which accounts for two-thirds of Britain's economy.
Moreover, most economists felt the Monetary Policy Committee usually preferred to move rates when it has carried out its quarterly inflation forecast, due in August. The BoE last cut rates in February -- another inflation report month -- by a quarter-point, although that cut was unexpected too. Most pundits had felt that incoming governor, Mervyn King, would not want to move interest rates at his first meeting since succeeding the retiring Sir Edward George on July 1. The BoE said in a statement accompanying the decision that it was concerned about sluggish conditions in the world economy which had weakened the prospects for British exporters. The pound's recent rebound on the foreign exchanges would also dampen inflation, it said. Financial markets reacted swiftly to the news with gilts and interest rates futures jumping sharply while the FTSE 100 share index rose slightly to be off 13 points on the day. The pound shed half a cent against the dollar to $1.636. NOT BIG SURPRISE AFTER ALL But economists who had predicted a rate reduction wondered why the market did not see this cut coming given the overall economic picture remained bleak. Britain's manufacturing output returned to its usual state of contraction in May after a short-lived rebound in output the month before.
Consumer spending and retail sales are losing steam while the country's trade performance is dismal, with the latest data showing exports to the moribund euro zone at a four-year low. And, having fallen around eight percent earlier this year, the pound has regained more than three percent in value since the MPC last met in June, threatening to crimp exports further. In fact, King himself said in an interview with the Times newspaper last week that that was the most important piece of news since the last meeting and would make some difference to the outlook for growth. Business was swift to welcome the decision: "The new governor has started on the right foot by presiding over today's decision to cut rates," said David Frost, Director General of the British Chambers of Commerce. "Now is a critical time for businesses. GDP growth is sluggish, the high street spending boom is over and overseas demand is weak. Meanwhile, inflation is well under control." The European Central Bank will soon announce its interest rate decision. All 62 ECB-watchers in survey last week reckoned the bank would leave its benchmark minimum bid refi rate unchanged at 2.0 percent at this meeting.//