Dec. 3 -- The Bank of England decision this week has divided economists by the most in three years, with a majority predicting policy makers are too concerned about inflation to cut the benchmark interest rate yet.
The Monetary Policy Committee will leave the bank rate at 5.75 percent on Dec. 6, according to 44 of 61 economists in a Bloomberg News survey. The rest predict a quarter-point reduction. That's the biggest split since June 2004.
Governor Mervyn King said last week that the inflation threat from record oil prices is ``complicating life'' as the bank considers the first interest-rate cut in two years. Three other policy makers have echoed him, saying they face a dilemma as surging credit costs threaten economic growth and the housing market heads for its worst performance since 1995.
``They will want to see more evidence that the slowdown in the economy is damping inflation before they move,'' said Jonathan Loynes, chief U.K. economist at Capital Economics Ltd. in London, who predicts no change. ``A cut is coming sooner or later. It's very close, and I won't be surprised if they do.''
Factory Growth
U.K. manufacturing growth unexpectedly quickened in November and factories raised prices, weakening the case for a rate cut this year, a survey of purchasing managers by the Chartered Institute of Purchasing and Supply showed today. The pound rose as much as 0.6 percent against the dollar after the report and traded at $2.0636 as of 11:49 a.m. in London.
In the 13 countries sharing the euro, manufacturing growth accelerated for the first time in five months, another purchasing managers' index showed today.
The U.K. benchmark rate is the highest among the Group of Seven industrialized countries. The U.S. Federal Reserve lowered its main rate to 4.5 percent on Oct. 31, and the European Central Bank, which also makes a decision this week, kept its key rate unchanged at 4 percent last month.
Oil prices, which reached $99.29 a barrel on Nov. 21, are eroding consumers' purchasing power as higher interest rates raise the cost of credit. The U.K. inflation rate exceeded the central bank's 2 percent target for the first time in four months in October. In euro area, inflation reached the fastest in more than six years last month.
BOE Forecasts
U.K. economic growth will probably ``slow sharply'' next year, and the risks are ``on the downside,'' King said Nov. 14. The bank's quarterly forecasts, published the same day, showed growth cooling to around 2 percent next year after more than 3 percent in 2007.
The housing market will stagnate next year in the worst performance since 1995, when the last property slump ended, Nationwide Building Society predicts. Home prices fell the most in 12 years last month, the lender said Nov. 29.
Concern about losses from the U.S. subprime mortgage markets has made banks reluctant to lend to each other, pushing up borrowing costs for companies and households. The cost of borrowing pounds for one month rose to 6.72 percent today, the highest since December 1998 and 0.97 percentage point above the central bank's benchmark rate.
``Continuing fragility in the banking system'' has increased the risk that money markets will ``tighten'' at year end, the bank said Nov. 29 when it announced longer lending periods in its money auctions.
`Credit Worries'
``Credit worries are persisting,'' said Neil MacKinnon, a former U.K. Treasury who is chief economist at London-based hedge fund ECU Group. ``They should cut and there's a good chance they might.''
The Shadow Monetary Policy Committee, a group of U.K. economists which meets monthly before the bank's decision and makes its own call on where the interest rate should be set, favored a cut in a 5-4 vote. The central bank has only moved rates once in December since winning its rate-setting powers a decade ago, when it reduced the benchmark in 1998.
Most economists forecast the bank to reduce the benchmark rate by February, the Bloomberg survey showed. The bank's panel voted 7-2 to keep the rate unchanged last month, as the majority defeated votes for an immediate cut by Deputy Governor John Gieve and David Blanchflower.
Deputy Governor Rachel Lomax said Nov. 22 that the bank faces a dilemma in signaling rate cuts while oil prices rise. Chief Economist Charles Bean said in a newspaper podcast interview released Nov. 26 the bank is at a ``juncture where we are faced with conflicting forces'' and Andrew Sentance said the next day that higher commodity costs ``need to be weighed in the balance against downside risks.''
``It's very finely balanced,'' said Ian Kernohan, an economist at Royal London Asset Management, who predicts a cut this week. ``I can't recall a similar situation in the past couple of years. That's why the City is so split -- because even if there is a cut vote it won't be unanimous.''
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