LONDON, July 31 - Worries over the strength of consumer spending will likely prompt the Bank of England to keep borrowing costs on hold in August and a narrow majority of economists think British interest rates have reached a floor. All 42 economists in a survey, taken July 29 to 31, think the bank will leave its benchmark repo rate at its current 48-year low of 3.5 percent when it meets on August 6-7. The mid-range forecast showed an 80 percent chance that rates would remain on hold in August, with a 20 percent chance of a quarter point rate cut. "Data relating to the consumer sector...have suggested that the threat of significant retrenchment is smaller than originally thought by the bank," said Ryan Shea at Bank One in London. "Further easing is unlikely (in August) and...the trough in the base rate has probably already been achieved." He is one of 24 economists who say rates have already reached a floor, while 18 said rates have further to fall. This is roughly in line with the results of a snap poll after the bank cut rates on July 10, when 21 out of 35 economists said the next move in British rates would be up. If the bank leaves rates on hold in August, 17 said the next move would be a quarter point cut by the end of the year, while one saw the cut in May 2004. Of those who said the next move would be a quarter point rise, one said October this year, 18 said 2004 and one said February 2005. Four did not give an answer.
SHOPAHOLICS
The Bank of England trimmed rates by a quarter percentage point, citing the prospect that the strength of sterling could lower inflation and that the global economic recovery had remained hesitant. But a lone voice of dissent came from deputy Bank of England governor Rachel Lomax who has been vocal about rising debt levels in Britain. Sterling has weakened since the last policy meeting, but expectations of a spending slowdown were quashed when consumer credit rose by a record 2.16 billion pounds in June and mortgage lending rose by 7.8 billion pounds. In addition, consumers went on a shopping spree during June's heat wave, prompting retail sales to jump by 1.9 percent. "The strength of retail sales and new record levels of household borrowing back the Lomax view that further rate cuts might fuel an unsustainable boom and do more harm than good," said Julian Jessop at Standard Chartered Bank in London. However, some economists think June's strong consumer figures are simply a one-off occurrence. "At the moment we have one strong area and that's the consumer sector, but we still think this was largely a weather- related blip," said James Knightley at ING Financial Markets in London. "With less well-performing sectors of the (British) economy and also the global economy, we think the bank could well decide that it needs to ease one more time."
GROWTH PICTURE
Those who see further rate cuts also say weak gross domestic product data, which showed the economy grew just 0.3 percent in the second quarter after only 0.1 percent in the first, have paved the way for looser monetary policy. Economists said all eyes will be on the bank's inflation report -- its quarterly analysis of the economy -- which will be published on August 13. Still, there are some who see tighter monetary policy by the year-end. "Evidence from overseas economies, the United States in particular, suggests that activity beyond the UK's shores is picking up," said Richard Jeffrey at Bridgewell Securities in London. "We expect the (bank) to have started raising rates by the end of the year." The mid-range forecasts showed rates at 3.5 percent at end-2003 and at 4.0 percent at end-2004.