Monday, December 19, 2005

Bank's Chief Economist hints at rate cut's for the New Year

INTEREST RATES could be cut early in the new year by the Bank of England’s monetary policy committee (MPC), says the Bank’s chief economist.

Charles Bean, a member of the committee, told The Sunday Times that the recent drop in inflation from 2.5% to 2.1% had removed one uncertainty from the Bank’s projections.
He challenged the view that a rate move before the spring was highly unlikely because of the MPC’s desire to see how the winter pay round develops.

“I don’t think it’s a case of saying we are just going to sit here until the springtime doing nothing,” he said. “It will be very much responding to the news coming in.”
Many money-market analysts had assumed that rates would be on hold for months after comments by various MPC members. But recent figures on inflation and pay have been encouraging. Official statistics last week showed average earnings growth, including bonuses, dropping from 4.1% to 3.6%.

The unemployment claimant count rose in November for the 10th consecutive month, hitting 902,000. The Labour Force Survey measure of unemployment rose from 4.7% to 4.9%.
Bean voted for a rate cut three times last year, in June, July and August. Only on the third occasion was there an MPC majority for a cut and base rate dropped from 4.75% to 4.5%.
“I didn’t find any difficulty voting against the governor or other Bank members,” he said.

The crunch for the MPC will come in February, when it prepares forecasts for the quarterly inflation report. If inflation is continuing to fall and prospects for growth appear weaker than the Bank expects, that could pave the way for a reduction in rates. Andrew Smith, chief economist at KPMG, said: “I think rates are going to have to come down. The slowdown in real income growth is not going to be easily reversed and inflation is coming down nicely towards the target.”
This week the Bank will publish the minutes of the MPC’s December meeting, which are expected to show a 9-0 vote in favour of unchanged rates.
Consumer spending and housing market prospects are also an uncertainty for the Bank. This week Capital Economics, one of the most bearish forecasters, is expected to drop its prediction of a 20% crash in house prices. Ideaglobal.com, the financial research consultancy, expects a 4% rise for next year.

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