Economists vote for UK rate cut

Bank of England Chief Economist Charlie Bean voted for an interest rate cut for the first time in almost two years, spurring the biggest gain in two-year government bonds since January 2004 on speculation the bank will lower borrowing costs.

Two Bank of England policy makers, Bean, 51, and outgoing Monetary Policy Committee member Marian Bell, 47, voted for a quarter-point reduction at the June 8-9 meeting, dissenting from the majority view of keeping the benchmark repurchase rate at 4.75 per cent for a 10th month, minutes released Thursday in London showed.

The votes highlight increased concern on the committee about signs of faltering growth in the UK economy, Europe's second largest. The UK expanded at the slowest pace in almost two years in the first quarter and reports since have suggested consumer spending, which drove 51 quarters of growth, is slowing.

"A rate cut could come as early as August or September," said Kenneth Wattret, senior economist at BNP Paribas SA in London. "When you really cut to the chase, the economy is weakening, with the focus on the weakness in the consumer sector. The pressure is mounting on the MPC."

Interest-rate futures trading suggests that investors are increasingly predicting rate cuts before the year is out. The rate on the three-month contract maturing in December fell 16 basis points Thursday to 4.48 per cent in London as of 11:42 am. The yield on the two-year note fell 11 basis points to 4.2 per cent, its biggest one-day drop since January 9, 2004.

Majority view

Faltering growth is increasing pressure on central banks across Europe to pare rates. Sweden's Riksbank lowered its main rate half a point Thursday, to a record low. European Central Bank council member Klaus Liebscher said Thursday the bank is "open in all directions" as it waits for economic data to decide on whether a change in rates is warranted.

The majority view on the Bank of England's committee was that the decline in market expectations for rates "amounted to a loosening of monetary conditions and would consequently tend to support activity."

The highest interest rates among Group of Seven nations, a wilting property market and oil prices above US$50 a barrel have made consumers more reluctant to spend. UK retail sales barely rose in May, dragging the annual rate of increase to the lowest in more than six years.

Wait and see

"There was time to gather further evidence on the depth and extent of the slowdown in consumption to see if lower interest rates were warranted," according to the majority view on the Monetary Policy Committee. "A reduction in rates at this juncture would be a significant surprise, and would run the risk of the inference being drawn that the committee believed the situation had deteriorated more than it, in fact, thought."

Consumer price growth accelerated to a seven-year high 1.9 per cent from a year earlier in May, the government's statistics office said on June 14, unchanged from April. The previous day, central bank Governor Mervyn King said spending on services remains "resilient" and that the effect of cheap import prices may soon wear off.

Most committee members judged that lowering rates now might "accelerate the recovery in consumption growth and lead to inflationary pressures." The bank last cut rates in July 2003.

Source: China Daily