| MPC resists cutting rates for now, but for how long? |
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UK economists are beginning to feel that a rate cut in borrowing seems to be imminent before Autumn as the economy weakens further. This is in response to the announcement by Bank of England that the interest rates remain unchanged for the tenth straight month, keeping them at 4.75%.
The economists are clamoring for a rate cut to save the bleeding manufacturing and retail sectors and boost jobs. The financial markets and forecasters expect the first rate cut to be announced in the near future, perhaps as soon as August.
The move resulted in the pound loosing two cents against the dollar, and the FTSE dipping to below the 5000 mark only to recover later and close at 5009.2.
A report by the CBI released this week has warned that the high street gloom has started to eat out the service sector too, with businesses such as cinemas and restaurants being the worst affected.
Manufacturing is at it’s weakest for quite sometime, with the three monthly average showing a fall of 1.4% in production. As per George Johns, an economist at Barclays Capital, “The underlying trend reveals a gradual decline in manufacturing activity.”
Chief economist with the Royal Bank of Scotland Group, Andrew McLaughlin said, “The risks for growth and inflation are to the downside though not yet sufficient to prompt preemptive policy loosening. I expect the MPC to leave rates on hold until November, though the odds are that the first cut will come sooner rather than later.” Inflation though has held at 1.9%, below the 2% target set by MPC.
The deficit in goods during April stood at £4.8 billion, which is almost 5% of the GDP, while services delivered a surplus of £1.4 billion. As per Michael Saunders of Citigroup, “In practice, the MPC is trying to stabilise the overall economy, not just manufacturing, which is only about 15% of GDP and falling.” This implies that MPC might not cut rates immediately and would try to hold until it becomes more apparent that the consumer is retrenching.
Import and export volumes have shown a rise, as per Malcolm Barr of JP Morgan, which could be a sign that activity is picking up. For now, industry has to wait and watch, as to when MPC opens its purses, if at all it does.
Posted
on : Mon, 13 Jun 2005 10:40 GMT | General News
By : Anne Philips
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