Rate Cut On The Cards? 12/05/2005

Expectations of a hike in interest rates over the summer all but evaporated today after the Bank of England signalled it was unlikely to raise rates in the near future. Many economists, who had predicted the hike over the summer, are now pencilling in two quarter-point cuts in rates before the end of the year.

Mervyn King, the governor of the Bank, presented the quarterly inflation report in which he admitted that the Monetary Policy Committee (MPC) had been surprised by the weak run of economic data in the past couple of months. The report lowered the previous forecast of economic growth over the next two years, although the risks to growth remained on the downside.

Mr King said: "The speed of the slowdown did come as a bit of surprise," though he stressed that the MPC thought consumer spending may recover during the year as employment growth remains robust.

The Bank also said in the report that it expects the Consumer Price Index (CPI) to rise above its 2% target in coming months, following a high of 1.9% in March. However, the Bank added that it expects the rate to settle down to around the target level (2%) within two years.

Mr King cited profit warnings from a number of retailers, business surveys, reports from the High Street and official retail sales data all pointing to an easing of consumer spending. The report also made clear the MPC was aware that the deceleration in house price growth may be associated with a more prolonged slowdown.

He also mentioned that the MPC had an open mind about its next move in interest rates, which would depend on how the economic data developed. He warned against reading too much into data showing a plunge in manufacturing output in March, saying the series was very volatile. The services sector, which accounts for about 70% of the economy, seemed to be growing strongly.

Alan Clarke, a UK economist at BNP Paribas, commented: "The wording they used gives them more time to leave interest rates where they are. Essentially, they have downgraded the inflation forecast and this takes away the threat of an interest rate hike."