Further interest rate cut not expected until mid-2008
by Kay Murchie
In a speech yesterday, Bank of England Deputy Governor, Rachel Lomax, has warned of slowing growth and rapidly rising inflation in a sign that interest rates will come down slowly.
The global economy looks bleak said Ms Lomax, there have been financial and banking crises before, but not on the present global scale. This must surely be the largest-ever peacetime liquidity crisis, she told the Institute of Economic Affairs in Westminster.
Ms Lomax continued by saying the accident waiting to happen in US sub-prime mortgages and the wider credit markets ‘lends itself to a wide range of predictions about the possible course of events from now on, from the relatively benign to the frankly apocalyptic’.
UK inflation will ‘rise sharply in the near term’ while the economy will grow ‘at below-trend rates over the next 2 years’ even if the Bank of England’s Monetary Policy Committee cuts interest rates significantly. This highlights the dilemma as it tries to balance the risk of runaway inflation with the need to boost economic growth, explained Ms Lomax.
Ms Lomax said a temporary improvement in inflation, by itself, does not mean the committee needs to tolerate a significant weakening in demand.
However, if inflation expectations appear to be persistently elevated, the committee will need to tolerate more slack to keep inflation on target. And that means it will have less scope to respond to slowing demand, the risk posed by the current turmoil in financial markets, concluded Ms Lomax.
Most economists are predicting further cuts in interest rates with another quarter-point reduction to 5% expected by the middle of the year.
Allan Monks, an economist at JPMorgan, said our broad take on MPC commentary currently is that the committee is prepared to respond to weaker growth by cutting rates more aggressively than flagged in the February inflation report, but it needs the data to push it to do so.
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