If the Bank of England has done its sums correctly, last week’s 0.25% rate cut “is likely to be the last,” said Edward Hadas on Breakingviews.com.
In its quarterly inflation report, the bank scaled back its UK growth forecast for 2005 from 2.5% to around 2% – however, it expects GDP growth to recover fairly rapidly to above 3% in 2007.
And with oil prices continuing to rise, projections in the bank’s quarterly inflation report “suggest that 4.5%” is the lowest that interest rates can go safely, despite market expectations that rates would fall to 4% by the year-end.
Two scenarios are suggested in the report: if rates remain at 4.5%, the bank’s central forecast puts inflation at around 2%, its target rate, by 2008. But at 4%, the “central expectation” rises to 2.5%. “That makes it hard to justify another rate cut.”
The Bank of England regards last week’s 0.25% rate cut as “insurance,” agreed Lex in the FT. The main danger to its “sanguine” outlook is “wobbly consumer demand.” Last year the bank argued that the link between house prices and consumer spending was “greatly diminished,” but it admitted in the inflation report that weakening house prices might have hurt the consumer more than it expected.
But the consumer is not the bank’s only problem. The UK economy combines the US economy’s imbalances with the weak productivity and ageing demographic trends of continental Europe. Consumer debts are at “worrying levels” and Treasury forecasts are increasingly “less credible”.
Low unemployment, solid export demand and a strong service sector means there is little to suggest the UK can justify “an even more accommodating monetary policy”, which would risk re-inflating the housing bubble – but managing a “soft landing” will need more than “a little monetary tinkering.