Bank of England May Cut Interest Rate a Quarter Point to 5.25%

The Bank of England will probably cut its key interest rate for the second time in three months this week, setting aside concern that inflation will accelerate as economic growth slows, a survey showed.

The nine-member Monetary Policy Committee will lower the rate by a quarter point to 5.25 percent on Feb. 7, according to 58 of the 61 economists in a Bloomberg News survey. Two expect a half-point cut and one forecasts no change.

Falling house prices and higher market lending rates have put the U.K. economy on course for its worst performance since the end of the last recession in 1992. At the same time, Governor Mervyn King has indicated inflation pressures will keep the bank from following the Federal Reserve and slashing rates further in coming months.

``There is clearly a sense at the bank that rates are restrictive and need to come down,'' said Matthew Sharratt, an economist at Bank of America Corp. in London. ``Worries about inflation mean there won't be the same kind of aggressive easing as we've been seeing from the Fed.''
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Bank of England Keeps Benchmark Interest Rate at 5.5%

Jan. 10 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged today as policy makers assessed the effects of last month's reduction on the economy.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5.5 percent, as predicted by 40 of 50 economists in a Bloomberg News survey. The rest forecast a quarter-point cut.

Economists predict the Bank of England will wait until next month before lowering rates again as banks rein in lending, damping consumer spending and deepening a slowdown in the housing market. Officials are weighing those risks against inflation pressures after oil prices rose to a record.

``They don't want to take risks on inflation,'' said Stewart Robertson, an economist at Morley Fund Management in London. ``But they missed a trick here. They could have sent a supportive message in the face of a lot of gloomy news. We'll get a cut next month.''

The pound, which initially rose after the decision, fell to a record low 75.45 pence per euro today. Investors are speculating that the deteriorating economy will prompt the Bank of England to lower borrowing costs as soon as traded at 4.346 as of 5:12 p.m. in London. Minutes of the meeting, including how each member voted, will be published on Jan. 23.

U.S. Recession

U.K. Prime Minister Gordon Brown, lagging behind opposition leader David Cameron in opinion polls, is trying to reassure voters that the economy can weather a global slowdown. Brown, who will decide in the next few weeks whether to reappoint King as governor, said yesterday that ``low interest rates'' and ``low inflation'' will keep growth on track.

Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. say the U.S. may already be in recession and recent economic reports suggest the U.K. economy is cooling.

House prices dropped in the fourth quarter for the first time in seven years and shares in Marks & Spencer Group Plc, the country's largest clothing retailer, yesterday fell the most in at least 19 years after an unexpected decline in holiday sales.

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Pound Peak Fuels Pessimism as Currency Mimics Dollar

Just a month after rising to a 26- year high against the dollar, the British pound is starting to look more like the beleaguered U.S. currency.

The pound weakened against 12 of the world's 16 most actively traded currencies since reaching $2.1161 on Nov. 9. In the U.K., just as in the U.S., policy makers are cutting interest rates to restore calm in credit markets and home prices are declining.

``When we look at economies around the world which are exposed to similar problems as in the U.S., the U.K. is pretty high on our list,'' said Andrew Balls, a global bond fund manager at Newport, California-based Pacific Investment Management Co., which oversees $721 billion. ``Sterling is a good currency to sell.''

The pound depreciated 3.5 percent to $2.0195 after reaching the highest level since May 1981 and fell for a third straight week. It weakened 10 percent versus the Canadian dollar this year and 5.8 percent against the euro. The dollar lost 7.9 percent this year on a trade-weighted basis against a basket of six currencies that make up the Fed's U.S. Dollar Index. It reached a record low in November.

Strategists say there's more pain in store for the pound. Zurich-based UBS AG and Frankfurt-based Deutsche Bank AG, the world's biggest foreign-exchange traders, predict the currency will weaken at least 6 percent against the dollar in 2008. Pimco, a unit of Munich-based insurer Allianz SE, New York-based Merrill Lynch & Co. and Goldman Sachs Group Inc. say sterling may be overvalued by as much as 25 percent, based on the level of trading done between the U.K. and the U.S., and prices for the same goods in the countries.

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Inflation concerns lift euro and sterling

Eurozone and UK inflation concerns were aggravated Monday, pushing the euro and sterling higher against the dollar ahead of Tuesday’s Federal Reserve interest rate decision.

Sterling saw the bigger move after an unexpected surge in producer price inflation cast doubts over future UK interest rate cuts.

Headline output prices rose to a 16-year high of 4.5 per cent, reflecting the increasing pressure on manu­facturers to pass on costs to wholesalers. This was driven by a sharp rise in input prices to an annualised 10.2 per cent as fuel prices bit, the UK Office for National Statistics said.

Howard Archer at Global Insight said the data would reinforce concerns that elevated oil and food prices might push up consumer price inflation.

He added: “The Bank of England needs to be confident that slowing growth is diluting underlying inflationary risks before trimming interest rates further.”

The pound rose 0.8 per cent to $2.0480 against the dollar and added 0.9 per cent to Y228.81 against the yen. The euro fell 0.4 per cent to £0.7182.

Speculation that the European Central Bank’s next move on rates may be up was further fuelled after Joaquín Almunia, the European Union’s monetary affairs commissioner, reiterated ECB fears of higher oil and commodity prices feeding into firmer wage de­mands.

Meanwhile, Jürgen Stark, ECB executive board member, said eurozone inflation could be higher next year than the central bank’s current projections suggest.

Last week, ECB president Jean-Claude Trichet shocked markets by suggesting the central bank’s governing council had discussed an interest rate increase ahead of its decision to keep rates on hold at 4 per cent.

“In our view, economic data are on the verge of justifying a rate hike,” said Niels-Henrik Bjørn at Danske Bank.

Whether this is likely or not, most economists now believe eurozone interest rates will be on hold throug­hout next year, while the Fed is expected to cut US rates Tuesday by 25 basis points to 4.25 per cent.

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U.K. Pound Rises After Report Shows Rising Factory Prices

Dec. 10 (Bloomberg) -- The pound advanced against the dollar and the euro after a report showed U.K. factories raised prices at the fastest annual pace since 1991 in November, adding to inflation pressures.

The U.K. currency was also buoyed versus the dollar on speculation the Federal Reserve will reduce its benchmark interest rate a quarter-percentage point tomorrow. Manufacturing- output prices rose 4.5 percent from a year ago, after a 3.8 percent gain in October, the Office for National Statistics in London said.

``Sterling has gained some attraction today as U.K. economic releases have come in on the strong side,'' said Ian Stannard, senior currency strategist at BNP Paribas SA in London.

The pound rose 0.8 percent to $2.0452 by 5:08 p.m. in London, from $2.0304 on Dec. 7. Against the euro, it climbed 0.4 percent to 71.93 pence, from 72.21 pence.

Bank of England Policy makers cut the benchmark interest rate for the first time in two years on Dec. 6 to curb economic damage from higher credit costs. The central bank said then ``upside risks'' to prices remain as companies absorb higher energy and food costs.

A separate report today showed annual house-price gains accelerated in October.

House Prices

Home values climbed 11.3 percent from a year earlier, compared with 10.8 percent in September, the Department for Communities and Local Government said. Average prices were little changed on the month, rising to 220,195 pounds ($449,000) from 220,111 pounds in September.

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GBP Pounded by BoE

The greenback was mixed in the Wednesday session, advancing versus the British pound and the yen while struggling against the euro and Aussie. With the exception of the sterling, the higher yielding currencies rallied against the yen as speculators continued to jump back into the carry trades following the sharp unwinding of recent sessions.

Economic data from the US were largely softer than expectations. The October PPI increased by 0.1% on a monthly basis, down from a 1.1% increase previously while the annualized PPI jumped to 6.1% from 4.4% previously. Core PPI was flat on a monthly basis versus 0.1% previously, but the yearly core PPI jumped to 2.5%, from 2.0%. Meanwhile, retail sales for October were weaker with the headline report inline with estimates at 0.2%, but down from the previous month at 0.6%. The excluding-autos retail sales figure missed expectations, down to 0.2% versus 0.4% a month earlier.
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Sterling touched a 4-1/2 year low against the euro

Sterling touched a 4-1/2 year low against the euro and fell versus the dollar on Friday as fears of slowing economic growth and expectations of interest rate cuts continued to weigh on sentiment.

The pound has been under pressure versus the euro since the Bank of England last week signalled that interest rates are set to fall, hitting sterling's yield appeal.

Weaker than expected GDP data for the third quarter [ID:nONS003203] gave another reason for investors to sell the pound.

"GDP data was weaker than expected and investors are more worried about the outlook for the UK economy increasing expectations that the Bank of England may cut rates as soon as next month," said Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm.

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