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Thursday, 8 November, 2001, 06:40 GMT
UK interest rates could fall again
The Bank of England is considered likely to cut UK interest rates again, when its Monetary Policy Committee (MPC) completes its meeting on Thursday.
After six cuts so far this year, the bank's main interest rate stands at 4.5% - considerably higher than the equivalents in the eurozone and United States.
But while the financial markets are unanimous in their expectation of a minimum quarter-point cut, the fundamental economic evidence in Britain is decidedly mixed.
The rest of the world may be feeling the economic pinch in the wake of the US terror attacks, but most UK growth indicators are still persistently positive.
In the past few days, lobby groups have stepped up their campaign for a heavy cut in rates, mainly in order to bolster the flagging manufacturing sector, which has cut thousands of jobs since 11 September.
The Trades Union Congress, the Confederation of British Industry and the British Chambers of Commerce all called on the MPC to introduce a half-point cut.
CBI director general Digby Jones said there would never be a stronger case for a cut, while TUC general secretary John Monks said: "It is time to throw a lifeline to our exporters with a bigger cut in interest rates, giving us an economic shot in the arm and insulating us from the threat of global recession."
Mr Monks said the rate cut should be followed by a "pre-budget for jobs" from Chancellor Gordon Brown later this month.
Foxed by fundamentals
But as the MPC sifts through economic data, the case for a rate cut does not seem strong.
On 5 November, Prime Minister Tony Blair told a conference that UK economic fundamentals were "the strongest they have been in a generation", and pointed to low inflation, high employment and robust public finances.
The battered manufacturing sector continues to call for rate cuts and other assistance, but much of the rest of industry seems in reasonable shape.
Economic growth, although slowing slightly, at least remains positive - unlike in some other advanced economies.
More to the point, British shoppers continue to spend avidly.
The latest retail survey showed sales growth of 6% year on year in October, precisely at the time when consumers around the world were tightening their belts.
The MPC may not have a brief to boost British manufacturing, but it is certainly concerned with the likely emergence of inflation, and booming retail sales are a key indicator of price rises to come.
But while such data would generally point towards flat - or even higher - interest rates, the current circumstances are exceptional.
The new global situation, it is felt, has changed the fundamentals upon which interest rate decisions are made.
The feeling within the MPC is certainly inclined towards lower rates. Its October meeting was unanimous in favour of a cut, and several members were lobbying for a half-point reduction.
That is partly because the MPC feels that the current rosy figures may in fact disguise problems ahead, as slowing European and US economies inevitably take their toll on British performance.
Inflation, already tolerably low in the UK, will almost certainly fall further as demand slackens among Britain's recession-hit trading partners.
But it also stems from the fact that British interest rates are so much higher than those in comparable economies.
In the US, the Federal Reserve has cut interest rates 10 times this year.
The main US rate is now 2%, having been cut by 4.5 percentage points this year alone.
The differential in rates between Britain and the US gives the MPC considerable leeway to cut UK rates without upsetting the currency markets.
Britain's interest-rate lead helps support the pound against the dollar, which suits some policy makers in the UK, but British rates have considerable room to fall while preserving that effect.
The MPC decision is expected at 1200 GMT, and will be followed three-quarters of an hour later by a rate decision from the European Central Bank.
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