Outlook: Interest rates

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WILL NEXT week bring the fifth interest rate cut in five months? Industry certainly wants it, despite the improvement in confidence in the CBI's latest survey of manufacturing. The City expects it, too. Many analysts are pencilling in a quarter-point move in February, with a couple more to follow.

The arguments for additional reductions are essentially the same as they have been for some time now - they are to do with concern about the recession in manufacturing, and how far this has spilled over into the rest of the economy.

Growth did slow throughout last year, from 0.9 per cent in the final quarter of 1997 to 0.2 per cent by the last quarter of 1998. Inflation has been on or close to target for six months, and may fall further in the short term. The fact that growth of output in services has also weakened from 1.3 per cent to 0.6 per cent over the same time scale is, according to the lobbyists for another rate cut, proof that the economy needs more tonic.

But the case for more cuts right now is no longer totally compelling. The wait-and-see argument has got back on its feet after a series of knock- out blows between September and November.

At its heart is evidence that the economy is heading for a soft landing after all. The 0.2 per cent rise in GDP for the last quarter, reported last week, was stronger than most analysts had feared. Services have slowed, but not as much as gloomy surveys had suggested. Retail sales have been dismal as far as we know, but the January results are needed before the final verdict on the season can be passed. If this is as bad as it is going to get at home, there is every reason to leave rates unchanged for now unless there are new external blows.

Even the deflation claimed by the CBI is no reason for acting in haste. When inflation is low and stable, some prices are bound to fall. They are falling in manufacturing. But this is a relative price movement. What matters to the Bank is inflation overall, and this rate has scarcely budged, despite the economic slowdown.

So the members of the MPC should sit on their hands in February. Rather, they should wait for evidence on the first quarter of this year, for the revamped average earnings figures, and to hear from the Treasury what the Budget arithmetic will look like. Another month will not matter. At times of particular uncertainty about the economy,