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POLL-BoE to cut again in Feb, rates to trough at 0.5%

Published 01/08/2009, 12:12 PM
Updated 01/08/2009, 12:16 PM
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By Nigel Davies

LONDON, Jan 8 (Reuters) - UK interest rates will likely fall by another 50 basis points in February, according to a Reuters poll of economists after the Bank of England cut rates to their lowest ever level, with another half point cut still to come.

The BoE delivered a widely expected 50 basis point reduction on Thursday, taking rates down to 1.50 percent, the lowest in its 315-year history as it attempts to dull the pain from a hard-hitting recession.

But a rate-cutting cycle that has seen rates slashed by 350 basis points since October is not over yet, said economists.

Forty-eight of 58 economists in a poll taken after the rate decision expected the Monetary Policy Committee to cut rates again next month.

The majority of those, or 44, said they would cut another 50 basis points, while one said they would cut by 75 basis points, and three by a full percentage point.

"It's inevitable the BoE revises down its GDP and inflation projections, so there are certainly further cuts to come," said Alan Clarke, UK economist at BNP Paribas.

The BoE will release its updated forecasts on the economy when it publishes its quarterly Inflation Report next month. But a February cut will not be the last the BoE makes this year, with medians showing rates bottoming at 0.5 percent in the second quarter, in line with a pre-BoE meeting poll.

ZERO SUM GAME?

Some said the fall in the pound in recent months may have caused the BoE to slow down the pace of its rate cutting cycle.

"Worries over the already significant depreciation in sterling played a key role in the greater caution displayed by the MPC," said Matthew Sharratt at Bank of America.

Economists gave a 40 percent chance of the BoE following the lead of the U.S. Federal Reserve and taking rates down to near zero, compared with a 50 percent chance given in the last poll on Monday.

Clarke at BNP Paribas is one of six economists who still see rates falling to zero this year.

"The U.S. has got to near zero, so has Japan, and the UK's growth outlook is the worse of the lot. So if they can get to zero, why can't we?" asked Clarke.

Dire economic data has mounted since the bank's December meeting showing house prices fell by 16 percent last year, while the services-led economy shrank at a near record pace in the last month of the year, surveys showed.

Falling growth has been accompanied by a sharp fall in inflation. In a statement made accompanying the decision on Thursday the BoE said there remained a significant risk of inflation undershooting its 2.0 percent target in the medium term had rates been left on hold.

Clarke at BNP, like other economists, also expected the BoE to adopt other measures to support the economy.

Thursday's BoE statement said further measures were needed to increase lending to businesses and consumers. British firms have struggled in the current downturn as banks remain unwilling to lend money in order to repair their own balance sheets.

"It's not a question of the price of money, it's the availability of money," said Edward Menashy at Charles Stanley.

"If the banks find it easier to borrow from the Bank of England at half a percentage point less and do not go on to lend it out it has very little use to the economy at large." Rates are eventually forecast to rise again, with medians showing Bank Rate at 1.5 percent by the middle of 2010.

(For poll data click on )

(For factbox on changing forecasts see [ID:nL817472])

(Polling by Bangalore Polling Unit; Editing by Toby Chopra)

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