April 10 (Bloomberg) -- The Bank of England cut the benchmark interest rate for the third time since December as higher credit costs and the worst housing slump in 16 years threatened to push the economy into a recession.
The Monetary Policy Committee, led by Governor Mervyn King, lowered the bank rate by a quarter point to 5 percent, as predicted by 52 of 61 economists in a Bloomberg News survey. The rest forecast that it would remain at 5.25 percent. The European Central Bank kept its benchmark rate at 4 percent today.
Former Chancellor of the Exchequer Nigel Lawson said yesterday Britain is headed for a ``prolonged'' recession as the seizure in credit markets prompts banks to choke off the cheap loans that fueled a decade-long boom in consumer spending. The slowdown has encouraged policy makers to keep up the pace of rate cuts and set aside concerns about inflation, which reached a nine- month high in February.
``Credit conditions have tightened and the availability of credit appears to be worsening,'' the Bank of England said in a statement today. Slower economic growth this year ``should help to keep domestic inflationary pressures in check.''
The pound was little changed after the decision at 80.27 pence per euro. The currency has dropped 19 percent against the single European currency since September after investors reined in their growth estimates for the U.K. economy. It fell to a record 80.29 pence earlier today.
Recession Risk
At 5 percent, the Bank of England's benchmark rate is still the highest among the Group of Seven industrialized nations.
``It was the right move,'' said Richard Lambert, director general of the Confederation of British Industry and a former MPC member, in an interview on Bloomberg Television. ``Credit conditions are deteriorating and getting tighter. They're trying to steer a middle course.''
The rate cut may still not be enough to prevent growth from deteriorating in coming months. The International Monetary Fund yesterday said U.K. growth will slow to 1.6 percent this year from 3.1 percent in 2007, the worst performance since the end of the last recession in 1992.
``We are probably facing a recession of some sort in the western world,'' Lawson, who served as finance minister from 1983 to 1989, said in an interview. ``Not a severe recession, but in the U.S. and U.K. one that might be quite prolonged.''
DSG International Plc, the biggest U.K. consumer electronics retailer, said today earnings may drop 32 percent this year amid ``challenging'' business conditions. House prices declined 2.5 percent in March from a month earlier, the biggest drop since 1992, mortgage lender HBOS Plc said April 8.
U.S. Contagion
U.K. growth is slowing after contagion from the U.S. subprime mortgage market slump spread. The IMF predicts the crisis will cause $945 billion in losses, and with banks reluctant to lend, the Bank of England is struggling to steer mortgage borrowing costs with its benchmark rate.
``The credit crunch has been with us for eight months and isn't getting any better,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Group Plc, which predicts the central bank will cut its rate to 4.5 percent by February. ``The Bank of England has to steer a course between inflation and the real economy. It's not easy.''
Prime Minister Gordon Brown, whose reputation for economic competence is threatened by the housing slump, has indicated that price pressures aren't strong enough to stand in the way of action by the Bank of England to help the economy.
Brown's Problem
Brown helped extend the economy's longest period of uninterrupted growth for two centuries during his 10 years as finance minister. Still, a poll by Populus Ltd. on April 8 showed his approval rating fell to the lowest since he succeeded Tony Blair in June.
``While it hasn't been the government's fault, the economy is very quickly becoming the government's problem.'' Rick Nye, a political analyst at Populus, which conducts opinion polls for the Times of London, said in a Bloomberg interview.
The world's central banks are responding differently to the credit crisis, which comes as higher food and oil prices stoke inflation. The U.S. Federal Reserve has lowered its key rate 3 percentage points since September to 2.25 percent, while the ECB has refused to cut borrowing costs since markets seized up in August because inflation is above its ceiling.
Iceland's central bank today unexpectedly raised its benchmark rate to a record 15.5 percent to shore up the krona and damp inflation that is running at three times the target.
The Bank of England said today that commodity prices could raise price expectations and keep inflation above the central bank's 2 percent target. Consumer prices rose 2.5 percent in February from a year earlier after gas and electricity prices rose. Oil prices climbed to a record $112.21 a barrel in New York yesterday.
``They will ultimately be cutting rates more aggressively,'' James Shugg, a U.K. economist at Westpack Banking Corp., said in a Bloomberg Television interview in London. ``There is more bad news to come. They're being cautious because of the short term inflation risks. We're looking for another three cuts.''
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