Sunday 31 January 1999
The Bank of England meets on Wednesday and Thursday to decide if a fifth easing is needed, after trimming 150 basis points from the benchmark base rate since October. At 6 per cent, the benchmark rate is already at its lowest level since the Bank took charge of monetary policy in May 1997.
"Time is running out for strong sterling," said Ciaran Barr, senior UK economist at Deutsche Bank. "Surveys will continue to indicate the economy is hovering on the edge of recession." Mr Barr said he expects the Bank of England to snip a quarter-point from its base rate this week, sending sterling to 70 pence per euro.
On Friday the pound slid as low as $1.6419, its weakest since 13 January, but was little changed at 0.6910 per euro.
Surveys on Monday and Wednesday from the Chartered Institute of Purchasing and Supply will give policy makers the opportunity to examine the health of the economy before deciding rates. The most recent one on manufacturing showed that the ninth straight contraction had pulled the index to its weakest point since its inception in January 1992.
The CIPS's last services survey, which showed a second monthly contraction and employment shrinking for the first time on record, was released the day before the Bank of England opted to cut a quarter-point from the base rate and restore it to its lowest level since September 1996.
Analysts believe that the base rate could fall to 5.75 per cent this week. Two predict a half-point cut to 5.5 per cent and five expect rates to stay unchanged at 6 per cent. "There's room for plenty more easing in the coming months and that's going to take its toll on the pound," said Sean Callow, a currency analyst at market research firm IDEA. He said he sees sterling falling to 72p per euro in the coming months.
Lower interest rates weaken the pound by reducing the return on money market deposits. For now, the UK three-month deposit rate - currently 5.82 per cent - tops the 4.97 per cent offered in the US and 3.07 per cent for the 11 euro nations. The pound will find dwindling support from investors as that gap narrows.
"We're in for a modest descent" for sterling, said Claudio Piron, a treasury economist at Standard Chartered. "The longer-term rate outlook is that we've got another 50 basis points to go." He sees sterling falling to $1.63 by the end of February.
The National Institute of Economic and Social Research expects interest rates to decline to their lowest level in almost half a century, as inflation declines and growth slows.
"We now expect the Bank of England's base rate to fall to 5.0 per cent by the start of 2000 and below 4.0 per cent in 2001, taking rates down to a low not seen since 1955," said Martin Weale, an economist at the NIESR.
The institute expects inflation to ease to 1.2 per cent during the final quarter of this year, from an annual 2.8 per cent in December. Underlying inflation, used to set interest rates, is likely to decline to 2.1 per cent.
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