BBC Homepage World Service Education
BBC Homepagelow graphics version | feedback | help
BBC News Online
 You are in: Business
Front Page 
World 
UK 
UK Politics 
Business 
Market Data 
Economy 
Companies 
E-Commerce 
Your Money 
Business Basics 
Sci/Tech 
Health 
Education 
Entertainment 
Talking Point 
In Depth 
AudioVideo 

Wednesday, 20 June, 2001, 14:15 GMT 15:15 UK
Rate cut prospects fall in UK
Bank of England
Bank of England: cautious about domestic consumption
The Bank of England's Monetary Policy Committee (MPC) earlier this month voted 8-1 to keep interest rates on hold.

At its meeting on 5 and 6 June, the Bank of England left its key interest rate unchanged at 5.25%, after cutting it during the previous three months.

Only Sushil Wadhwani, a leading dove on the Committee, voted for a cut of 0.25%, according to the MPC minutes released on Wednesday.

Sushil Wadhwani, member of the Monetary Policy Committee
Only Mr Wadhwani voted for a cut to interest rates
The rest of the Committee, including governor Sir Edward George and new member Kate Barker, the former chief economist at the Confederation of British Industry, were anxious about the uncertain outlook for the UK economy.

The resolve to keep rates on hold in June suggests that the Bank may remain cautious about making further cuts in the future.

Imbalance

The members felt that another cut would exacerbate the imbalance between strong consumer demand and slower overall growth.

"The uncertainties about the current state of the economy and the possible risks to the outlook from the imbalances were sufficient to justify waiting for more information about how domestic demand would evolve," the minutes said.


I think we are looking at rates on hold for the rest of the year

Geoff Dicks
RBS Markets
The MPC also took into consideration the "robustness" of the UK housing market.

"It was possible that the housing market could become a source of further concern, if low levels of mortgage interest rates were to prompt a new house price boom," the minutes said.

In a further sign that the housing market could overheat, the British Bankers' Association has reported a record increase in mortgage lending last month.

Mortgage lending rose by 2.98bn during May - an increase of 13% on the previous month.

Geoff Dicks of RBS Markets believes that the MPC's worries about the UK consumer will diminish the chances of further interest-rate cuts.

"I think we are looking at rates on hold for the rest of the year," he added.

Political pressure

The MPC's latest meeting also came just before the UK general election.

At the time, analysts said any decision to change interest rates could have been viewed as politically motivated.

A rate cut might have given Prime Minister Tony Blair a last-minute boost ahead of the voting.

With consumer spending remaining buoyant, analysts also cited economic reasons for keeping rates on hold.

Threat to inflation

At the meeting the Committee members were weighing whether to bring inflation closer to the Bank's symmetrical target of 2.5% with a further cut.

However, they were concerned that another reduction in interest rates would "pose risks for the inflation outlook in the medium term".

As it was, a week after the meeting, new data showed that underlying inflation touched its highest rate in two years during the year to May.

The annual rate surged by 2.4% on the back of rising food and petrol prices, according to the Office for National Statistics (ONS).

"These minutes are of historical interest," said Michael Taylor of Merrill Lynch. "In terms of the current outlook things have moved on quite significantly since these minutes."

He added: "There are two things which suggest that perhaps the inflation outlook isn't quite as good as the MPC would have believed at the time.

"First of all sterling has fallen... that poses a medium term inflationary risk in terms of higher import prices (and) that is something the MPC will have to consider at their July meeting."

Underlying inflation is, however, still below the Bank's 2.5% target.

Manufacturing slowdown

The slowdown in the UK manufacturing sector prompted a minority of economists to call for an interest-rate cut at beginning of June.

They argued that British manufacturing badly needed a cut in rates to restore confidence.

Recent ONS data shows that the increasing expense of raw materials continued to put UK manufacturers under pressure in May.

Lower interest rates are intended to stimulate economic growth, amid worries that economic weakness in the United States could turn into a full-scale global downturn.

Hope for the US

The minutes, however, suggested that the MPC has become more optimistic about an economic recovery in the US.

"The slowdown in the United States was so far a little less marked that had previously seemed possible," the minutes said.

Nevertheless, the MPC acknowledged that "the (US) manufacturing sector was now plainly in recession".

The US Federal Reserve has implemented five 0.5% rate cuts this year, reducing rates to 4%.

Search BBC News Online

Advanced search options
Launch console
BBC RADIO NEWS
BBC ONE TV NEWS
WORLD NEWS SUMMARY
PROGRAMMES GUIDE
See also:

12 Jun 01 | Business
UK inflation hits two-year high
08 Jun 01 | Business
Pound under political pressure
11 Jun 01 | Business
High costs squeeze manufacturers
21 May 01 | Business
UK trade deficit hits record high
23 May 01 | Business
Big majority for UK rate cut
16 May 01 | Business
UK inflation to remain low into 2002
15 May 01 | Business
Can US rates go lower?
05 Apr 01 | Business
Who's Who at the MPC
Internet links:


The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.


E-mail this story to a friend

Links to more Business stories