Industry delighted as Bank slashes rates by half a point

Markets surprised as global slowdown pushes central bankers into bigger than expected cut

Chris Hughes Financial Editor
Friday 09 November 2001 01:00 GMT
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The Bank of England's surprise half-point cut in interest rates is likely to be followed by a further reduction of the same magnitude, City pundits said yesterday. However, uncertainty over the timing of the Bank's next move risked depressing stock markets in the short term.

Most City observers said it would be wrong to interpret yesterday's aggressive move, which took base rates to 4 per cent, as signifying that the Bank's Monetary Policy Committee believed the UK was heading for recession. Further cuts were nevertheless likely as the MPC, which meets monthly to set rates, appeared less worried about the risk of stoking inflation.

The Bank said yesterday's cut was required if inflation was to meet the 2.5 per cent target imposed by the Treasury. "The global slowdown may be somewhat deeper and longer than previously thought. World inflationary pressures, including commodity prices, are weaker," it said. "In the United Kingdom ... cost and price pressures are somewhat more subdued."

Steve Russell, UK equity strategist at HSBC, said: "This is the sort of rate cut that isn't all good news. The Bank's statement suggests it is more worried about the global outlook and less worried about inflationary pressures in the UK than it was before. But [the cut] clouds the issue about how much rates will fall. There's no reason why rates shouldn't fall by at least another 25 basis points as there's unlikely to be any hard data showing an [economic] improvement over the next month."

Peter Saacke, a strategist at Merrill Lynch, said: "The evidence from all around the world has been so dreadful that there's scope for another 50 basis points cut from here."

Philip Shaw, an economist at Investec Henderson Crosthwaite, said: "We'd expect a 0.25 per cent cut in December, with a further 0.25 per cent cut early next year."

He added that the odds on the UK slipping into recession were no more than 25 per cent. "But news of more job losses will mean it'll feel like a recession," he added.

Fund managers contented themselves that the Bank's move did not indicate possession of any yet to be disclosed worrying economic data. "The Bank is doing what everyone else is doing – looking at the overall background," said Andy Brough, a fund manager at Schroders. "They are saying that trading is tough across various industries. This should supply a real boost to households' cashflow."

Mike Bishop, a fund manager at Norwich Union, said: "There's no reason to panic. The answer to this lies in how old you are, and how many of these things you have seen before. The market is in a mood to look through this now. The risk is that companies' [earnings] don't recover and [cutting rates] is seen as pushing on a string."

The FTSE 100 index initially dipped when news of the Bank's move broke at midday, but a strong opening on Wall Street saw it close up 61.8 at 5,278.1. Despite the gains, there were warnings that uncertainty over the pace and scope of future moves by the MPC was likely to weigh heavily on share prices since rates were already at the level previously predicted for the year-end.

"There's a lot of uncertainty over what the MPC is thinking," said Investec's Mr Shaw.

HSBC's Mr Russell said: "The Bank must have known this would create more uncertainty in the markets, but we must assume that it considered the global situation is bad enough to warrant the move."

The rationale behind the MPC's move will be revealed when minutes of its meeting on Wednesday and Thursday this week are published on 21 November.

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