Bank to hedge bets with quarter-point cut

Economists expect rate-setters to steer course between inflationary pressures and acting on economic slowdown
Click to follow

City economists predict that the Bank of England's Monetary Policy Committee (MPC) will be cautious when it meets on Thursday, opting for a quarter-point cut in the cost of borrowing to 5.25 per cent.

A poll of 60 economists from financial group Bloomberg shows that 55 questioned believe the nine-strong panel will cut interest rates by just 0.25 per cent – in contrast to the aggressive rate-cutting policy adopted by America's Federal Reserve in the past few weeks.

"At this stage the Bank is probably right to just cut by a quarter," said Tony Dolphin, economist at fund manager Henderson. "It's got a difficult balancing act, with one eye on addressing the slowdown while at the same time there are price issues out there including wage inflation – we saw some higher- than expected deals go through in January."

In contrast, Henrik Degrer from Swedish bank SEB, one of just two economists polled who believes the Bank will cut rates by half a per cent, told The Independent on Sunday: "The UK is looking more and more like America by the day. The UK is a major player in the financial sector and we believe it's going to be hit much harder than many other countries. Add in the issues in the housing market and we see a lot of problems going forward. I think the Bank will realise the extent of the difficulties and cut by half of 1 per cent on Thursday."

David Kern, economic adviser to the British Chambers of Commerce, said he believed the Bank would opt for a quarter-point cut. However, he urged the rate-setting authority to take a bolder stance: "The longer the MPC waits, the bigger the danger that the situation will deteriorate, and the policy choices would become more difficult and even more unpleasant later in the year."

Federal Reserve chairman Ben Bernanke has slashed interest rates across the Atlantic by 1.25 per cent in the past two weeks, amid fears that the economy is lapsing into recession.

But so far his opposite numbers in Britain and Europe, Mervyn King and Jean-Claude Trichet, have resisted a loosening of the monetary belt.

On Friday, the extent of the slowdown hitting America was highlighted once again when it was revealed that US employers had cut back their hiring in January for the first time in more than four years, with some economists marking this as the "smoking gun" to prove America is entering recession.

In Britain, growth in the manufacturing sector slowed badly in January as export orders fell, while high oil prices drove companies' costs to a three-year high.

There seems little chance of any respite from higher prices, with Opec resisting pleas from American President George Bush to increase oil output.

The cartel's president said supply was not Opec's main worry. "We are more concerned about the economy and the crisis in the US."