Interest rate cut in balance

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The Independent Online
CITY economists remain divided over what the Bank of England will do about interest rates at its Monetary Policy Committee meeting this week.

Early last week the consensus was the MPC would vote to keep rates unchanged. "The Bank's quarterly inflation report is due in November," said Nomura's UK economist, James Mitchell. "The feeling was the Bank would hold on for a month and cut interest rates then."

By last Thursday, however, as stock markets went into freefall again after failing to react to a quarter point reduction in US interest rates, more analysts thought the Bank might reduce rates by a quarter of a per cent. "The downturn in the markets and the soft data on the economy will make it possible," said Mr Mitchell.

But analysts fear the hawks on the MPC will prevail. The City is unusually blunt in warning of the consequences of no cut. "The hopes for an interest rate cut have risen," an SBC Warburg economist, Paul Donovan, said. "But our view is that the cut is not going to come."

Mr Donovan castigates MPC members who are not in touch with City sentiment - those who "pop down from Oxford once a month" whom he predicts will vote against a cut in rates.

Mr Donovan acknowledges that econometric models are not producing data which make the case for an immediate interest rate cut. But he says that the economy is not behaving normally. "SBC Warburg believes the UK is in a recession," he said. "We believe rates should have been cut more already."

Investors and businessmen pressing for a rate cut, took heart from Chancellor Gordon Brown's broad hint in Washington Friday that the Bank would cut interest rates. "I'm not going to second guess the Bank, but everyone subscribes to the view that the balance of the risks in the world economy has shifted," he said. "We hear the Treasury has been briefing people that there will definitely be a quarter point reduction," said one economist. "But it may just be a rumour. We're hopeing it's not."

Silicon Valley Group, a US maker of equipment used to manufacture semi- conductors, announced on Friday that it was closing its plant in Billingshurst, West Sussex, and making 40 workers redundant. The company said its fourth quarter sales could dip below $100m. The plant closure is part of a cost- reduction effort, resulting in 1,200 of its 7,000 workers losing their jobs.