# Bank of England cuts benchmark rate



## moneymajix (7 February 2008)

*Bank of England Cuts Benchmark Rate as Growth Slows* (Update1) 

By Jennifer Ryan


Feb. 7 (Bloomberg) -- The Bank of England cut its benchmark interest rate by a quarter-point in response to slowing consumer spending and the steepest decline in house prices in a decade. 

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the key rate to 5.25 percent, the second reduction in three months. The move was predicted by all except two of 61 economists surveyed by Bloomberg News. 

The Bank of England was more cautious than the U.S. Federal Reserve, which lowered its rate at the fastest pace since 1990 last month after a slump in global stocks. King has said the U.K. bank faces a ``difficult balancing act,'' with inflation likely to accelerate further beyond its 2 percent target. 

``They will need to cut further but how far and how fast will depend substantially on inflation expectations,'' said George Buckley, an economist at Deutsche Bank AG in London. ``We see another rate cut in May but there is a risk that they will have to go earlier if the economic data get worse.'' 

The U.K.'s benchmark rate is still the highest among the Group of Seven nations. The European Central Bank will keep its rate at 4 percent at 1:45 p.m. in Frankfurt, all 56 economists in a Bloomberg survey predict. The Fed lowered its rate by 1.25 percentage points in two reductions last month to 3 percent. 

*Recession Risk *

Today's U.K. rate cut follows a 9 percent drop in the FTSE 100 stock index last month, the biggest in five years. Billionaire investor George Soros said Jan. 23 that a recession in the U.S. is ``almost inevitable'' and will be ``very difficult'' to avoid in Britain. The U.K. economy has expanded every quarter for 16 years. 

The Bank of England said that, while economic growth is slowing, there are still ``upside risks'' to consumer prices. ``Given this outlook for inflation, some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term,'' the central bank said in a statement accompanying its decision. 

Economists surveyed by the Treasury predict U.K. growth of 1.8 percent this year, matching the weakest pace since 1992. The central bank, which in November forecast expansion of about 2 percent, will release new predictions on Feb. 13. 

Banks have curbed lending to consumers and companies after writedowns and losses of more than $146 billion worldwide, threatening to exacerbate the economic slowdown. U.K. mortgage approvals fell in December to the lowest since at least 1999. 

*Housing Slump *

House prices slid for a third month in January, the longest stretch of declines since 2000, Nationwide Building Society, Britain's fourth-biggest mortgage lender, said Jan. 31. British Land Co. today reported a loss for the fiscal third quarter after its U.K. offices and shopping malls slumped in value. 

``Even before the problems with U.S. subprime, we were going to see a significant tightening in credit conditions,'' said Dario Perkins, an economist at ABN Amro Holding NV in London and a former U.K. Treasury official. ``Whatever happens in the global economy, U.K. growth could slow quite sharply.'' 

Retail sales fell the most in 11 months and manufacturing declined for a second month in December. Land of Leather Holdings Plc said Jan. 31 second-quarter sales dropped as Britons reduced spending on furniture. Wolfson Microelectronics Plc, the U.K. maker of semiconductors for Apple Inc.'s iPods, said on Feb. 4 first-quarter revenue will miss analysts' estimates. 

*Borrowing Costs *

Today's quarter-point cut should reduce the average monthly cost of a 200,000-pound ($390,000) repayment mortgage, on a rate that tracks the central bank's benchmark, by about 31 pounds, according to the Council of Mortgage Lenders. 

Chancellor of the Exchequer Alistair Darling last month urged lenders to pass the full extent of the December rate reduction to consumers, after data from the Bank of England showed banks raised rates on two-year mortgages that month. 

The bank's decisions will be complicated by the combination of weakening growth and higher energy and food costs, King said Jan. 22. Inflation, which exceeded the bank's 2 percent target for the past quarter, may reach the quickest pace in a decade this year, he said. Factories raised prices last month to cover the rising cost of commodities, a survey showed on Feb. 1. 

*Inflation Concerns *

Consumers' expectations for inflation reached the highest since at least 2005 last month, a YouGov Plc survey for Citigroup Inc. showed. Policy makers have been watching for signs that labor unions, engaged in the biggest round of pay negotiations for the year, will demand larger wage increases and entrench inflation. 

Signs of resilience in some industries may add to the case for policy makers to pause after today's cut. Services growth unexpectedly quickened for a second month in January, according to a survey by the Chartered Institute of Purchasing and Supply. 

Economists predict the central bank will deliver further quarter-point reductions throughout the year. The rate will fall to 4.5 percent by the end of 2008, according to the median forecast of 44 economists in a Bloomberg News survey on Feb. 1. 

``While growth is slowing, the risks are that inflation will take off again,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London. ``There's no reason for them to come out all guns blazing and follow the Fed.'' 

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net . 


Last Updated: February 7, 2008 07:11 EST


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## numbercruncher (7 February 2008)

Hello


House prices going down on an Island of 60m, havin' a laff aint yah geezer 

This is clearly realestate downramping and should be treated with extreme scepticism.

If these people took Labouring jobs instead of kicking back in offices and going to rock concerts on the weekend there would clearly be no problem.


Thankyou


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