LONDON: City economists strongly believe the Bank of England will be compelled to cut interest rates to prop up the economy.
Fourteen out of 24 economists in the Square Mile surveyed by the treasury say they have strong reasons to believe that the central bank will cut the interest rates from the current 4.5 per cent to between 4.25 per cent and 3.5 per cent. Two of them felt the rates would remain at the current level, while eight said there could be a rise.
Deutsche Bank's U.K. economist George Buckley said the bank will cut the rates as GDP growth remains below trend and inflation eases further. But, he would not expect the cut to happen early as the retail sector had shown some visible signs of revival and the housing market is gaining confidence.
Bank of America's co-head of European economics Lorenzo Codogno said the central bank would have to reduce the rate to 4 per cent around year-end. The short-term outlook will be overshadowed by issues like poor productivity growth, a tailing off in immigration growth and perceptions of rising tax and regulation, which can affect the status of the country as a destination for investment.
Richard Jeffrey, chief economist at Bridgewell, which is known for its bullish perceptions, said the interest rates are ought to increase by half-point to 5 per cent over the year as he felt factors like higher interest rates, inflation and tax issues, which affected consumers in 2005, will "fade and possibly reverse". He is of the opinion that consumer spending will rise 3 per cent against the 1.8 per cent predicted by many.
Commerzbank's economist Gerard Muller subscribes to the view that there will not be any changes in the rates as there are no signs of the economy picking up speed. The period of correction on the housing market is coming to an end, he warned.
However, economists from Barclays Capital and Lombard Street Research expect the economy to surpass the Treasury's forecast and predicted there will be a growth of 2.7 per cent. Bridgewell's Jeffrey said it could be even 2.8 per cent.
One of the members of the central bank's Monetary Policy Committee, Steve Nickell, had in December voted for a quarter-point rate cut, mainly arguing that slower growth in government spending would weigh on prospects for growth and inflation.
Analysts also expect a cut in the rates as oil prices ease back from last year’s record highs, which has helped to contain inflation to the bank’s 2 per cent target. They say inflation will continue to subside this year.
Posted
on : Mon, 02 Jan 2006 14:10 GMT | Mortgages News
By : Anne Philips
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