Bank of England Cuts Interest Rates

In a sign of deepening concern about the economic fallout of the global credit crunch, the Bank of England cut its key interest rate by a quarter point to 5.5%, the bank's first cut in over 2 years. European Central Bank policymakers, meanwhile, kept their key rate on hold at 4% but are expected to stress the likelihood of slower 2008 growth at a press conference later today. Amid a spate of data suggesting U.K. growth is slowing and widespread hope in markets for a rate cut, British policymakers lowered the key rate from a 6-year high. In a statement accompanying the decision, the 9-member Monetary Policy Committee said, "Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead." Before the credit-market turmoil hit in August, many analysts still expected robust house-price and financial-sector growth to bring U.K. rates higher by year end. But the Halifax house-price index released yesterday showed house prices dropped 0.8% in November from a month earlier, the biggest drop since June 1995. A closely-watched survey of U.K. service-sector purchasing managers, also out recently, slumped to a 4-1/2 year low of 51.9, just above the 50-point level dividing expansion from contraction. Services account for around two-thirds of U.K. GDP.

"Although output in the United Kingdom has expanded at a brisk pace for the past 2 years, there are now signs growth has begun to slow," BOE policymakers said. In comments that stoked expectations of further interest-rate cuts, they said inflation, that breached the central bank's 2% target to hit 2.1% in Oct., can also fall as the economic expansion eases. An economist with UniCredit in Milan wrote while MPC members still see upside risks to inflation, it seems a gloomy growth outlook is definitely taking the center stage in their medium-term assessment. They expect the BoE will cut interest rates twice more to 5%, with a 1st step in Feb., he wrote. The Bank of England's move could signal a global trend toward lower rates, as fears mount at central banks world-wide that the global credit crunch will have significant economic fallout. The Bank's move comes 2 days after the Bank of Canada cut rates for the 1st time since April 2004, lowering 1/4 point to 4.25%. Central banks in Australia and New Zealand this week decided to keep rates steady, despite persistent inflation fears, as policymakers fretted the credit crunch can crimp growth. The Federal Reserve, which already cut its key rate by 3/4 of a percentage point since September, is widely expected to cut rates again on Dec. 11 by at least 1/4 percentage point. Fed officials are also discussing other ways to respond to a global reluctance of banks to lend to each other for more than a few days. In Japan, where rates remain extraordinarily low, the Bank of Japan has been forced to delay moves to boost rates to more normal levels. Though ECB policymakers have continued to stress the fundamental economic health of the 13 countries that share the euro currency, recent signs have pointed toward a slowdown. Retail sales posted a weaker-than-expected annual rise in Oct., while growth in service-sector activity hit a 27-month low. Central bank staff, who in Sept. forecast GDP growth of around 2.3% in '08, are expected to revise down those predictions to about 2% in new projections today. But soaring food and energy prices are pushing up euro-zone inflation, that's likely to keep the ECB from lowering its key rate soon. Inflation surged to a 6-1/2 year high of 3.0% in November, from 2.6% in October. The ECB aims to keep inflation just under 2%. Most economists expect the combination of slowing growth and rising inflation to keep the bank on hold at 4% through 2008, but a growing minority is forecasting cuts by June 2008.