Sunday 13 September 1998
"The economy is definitely slowing down. It is inevitable that the Bank of England will cut rates," said Ben Shenton at Quilter & Co. "The current deutschmark price already reflects that expectation."
On Friday, the pound was little changed, near a 10-month low, at 2.8426 marks. Against the dollar, it rose as high as $1.6953, a five-month high, as concern that President Bill Clinton may be impeached hurt the US currency.
Although the Bank of England left the benchmark interest rate unchanged at 7.50 per cent on Thursday, as expected by economists, it acknowledged that global economic woes could damp inflation and hold down growth in the UK.
The Bank of England said it recognised that the "deterioration of the international economy could increase the risk of inflation falling below" the government's target rate of 2.5 per cent.
"This is the closest you can get to a bias for easing," said Julian Jessop, chief economist at Nikko Europe, who expects that the pound will fall to 2.80 marks by the year-end. Still, he said, "we probably have to see another couple of months of higher unemployment before we see an easing."
The implied yield on the December short sterling futures contract, a measure of interest rate expectations, has fallen 17 basis points in the past week to 7.05 per cent. That suggests heightened expectations rates will be cut before the end of the year.
Inflation is already accelerating close to the government target. In July, retail prices minus mortgage interest payments, Britain's preferred measure, rose 2.6 per cent. A report on Tuesday will show RPIX was unchanged in August, according to the median forecast of economists surveyed by Bloomberg News.
Also due for release this week is a report on wage increases. Average earnings growth probably slowed to an annual 4.8 per cent in June, from 5.0 per cent in May. Still, the central bank says wage growth above 4.5 per cent can fuel rising prices.
"We'd be looking for lower rates in the first quarter," said Murray Gunn at Standard Life Assurance. He said he has been selling the pound on the expectation that it will fall to as low as 2.75 marks in the next three months.
UK companies are hopeful that lower borrowing costs can help their business. For building companies, that means more people will be willing to borrow money to buy houses.
"Falling interest rates will help our 1999 new-year market," said Michael Chapman, the finance director at building company Bryant Group.
The US dollar tumbled to a five-month low against the yen on concern that the report by Independent Counsel Kenneth Starr may prompt Congress to try to impeach the US.President. Traders also sold the dollar on speculation that the Federal Reserve may cut interest rates as early as this month after the fall in the stock market and on talk that the US Treasury may be softening its long-standing support for a strong dollar.
The dollar fell to 130.98 yen from 134.52 on Thursday. Against the mark it was trading at 1.69, close to a 15-month low.
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