Interest rates bound to drop soon, say analysts
Jan 11 2008 by Karen Dent, The Journal
THE Bank of England’s decision to keep interest rates on hold has provoked a mixed reaction, but business organisations are united in expecting a cut in the cost of borrowing next month.
Members of the Bank’s Monetary Policy Committee (MPC) yesterday voted against reducing rates from 5.5%, despite pressure from retailers after a disappointing Christmas.
The British Retail Consortium (BRC) said the high street had been hit hard as shoppers kept a tight grip on their purse strings. BRC director general Kevin Hawkins said: “The worst Christmas sales growth for three years shows consumers and retailers are still feeling the effects of five previous rate rises as other bills continue to shoot up.”
His view was echoed by the North East Chamber of Commerce, which said the Bank had missed an opportunity to inject renewed confidence into the business community.
Manufacturers’ organisation EEF agreed the MPC had missed its chance. “The evidence from the past month points to a growing risk of a weaker economy and there is little reason to believe the case for a cut will be any less strong next month,” said EEF Northern director Alan Hall.
Keeping the cost of borrowing static will increase the risk that emergency measures will be necessary later in the year, says PricewaterhouseCoopers at Newcastle. Senior partner Paul Woolston said: “After cutting rates in December, the committee’s natural inclination was probably to wait until at least next month. Therefore a decision to wait wasn’t surprising, but in our view it was the wrong one.”
Newcastle Building Society predicted a quarter-point rate reduction in February, triggering a series of cuts during the year. Lending executive Steven Marks said: “At a time when double-digit increases in energy costs are being imposed, when access to credit is becoming more difficult and when there is so much general economic uncertainty, the sentiment behind such cuts becomes almost as important as the cuts themselves.”
The North-East branch of the Institute of Directors (IoD) also expects a February cut, but said yesterday’s decision was the right one.
The MPC’s vote is likely to have been close, as members juggled poor Christmas retail sales figures, statistics showing the first quarterly fall in house prices since 2001 and disappointing data from the manufacturing and services sectors, with keeping a lid on inflation.
The Consumer Prices Index is above the Government’s 2.1% target, while high oil prices, food costs, and the prospect of energy bill increases all add to the inflationary pressures.
