Rates of 5.5% on the way, says Barclays

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The Independent Online
HOME-BUYERS and businesses could be enjoying interest rates that are two percentage points lower by the end of next year, according to a forecast published today.

While not ruling out one more rise in the cost of borrowing to 7.5 per cent this year, Barclays Bank is predicting that the Bank of England will be cutting interest rates to as low as 5.5 per cent by the end of 1999.

This is much lower than the rate currently expected by the financial markets. At the end of last week prices in the short sterling futures market indicated a market expectation that rates would be around 6.5 per cent in December 1999.

The explanation for Barclays' optimism on loan rates is the bank's pessimism about growth. Chris Wright, its economics director, reckons the economy is in for a hard landing, with growth slowing to below 1.5 per cent next year.

"A key concern is that the economy may be weakening more sharply than generally expected," he said. Export growth had come to a halt and manufacturing output was declining.

Economists - including the members of the Bank of England's Monetary Policy Committee - differ widely as to how severe the slowdown is likely to be. Although all agree that growth is slowing, the division between manufacturing, which is in recession, and services, which are still expanding rapidly, makes forecasting an even darker art than usual.

The latest monthly round-up of forecasts published by the Treasury shows predictions for growth ranging from 1.1 per cent to 3 per cent for this year and next. The average is for a soft landing of just over 2 per cent in 1998 and just under 2 per cent in 1999, with Barclays amongst the gloomiest handful of the 45 covered.

The next meeting of the MPC is on 3-4 June, and any rate move then would come as a surprise. However, recent figures showing a shock rise in average earnings growth have made analysts cautious.

The key statistics due before the meeting are the CBI's monthly survey of industrial trends and the latest trade figures. Both are likely to focus attention on the weakness of manufacturing and the export sector.

The latest published minutes, for the April meeting, showed a 5-3 vote against raising rates, from 4-4 the previous month. The MPC also made no move in May, and the switcher, Professor Charles Goodhart, is presumed not to have swung back.

The ninth and last member of the MPC, Professor John Vickers, will be joining the Bank as its chief economist before the June meeting, changing the voting arithmetic.