Bank of England unlikely to follow ECB's rate cut

LONDON Thu May 2, 2013 6:47pm BST

The Bank of England is seen behind holly bushes in the City of London March 15, 2013. REUTERS/Suzanne Plunkett

The Bank of England is seen behind holly bushes in the City of London March 15, 2013.

Credit: Reuters/Suzanne Plunkett

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LONDON (Reuters) - The chances of the Bank of England following the European Central Bank by cutting its benchmark interest rate look slim.

The British economy remains weak and the next governor of the central bank, Canadian Mark Carney, probably wants to send a strong signal of intent when he takes over in July.

Yet the option of cutting the Bank of England's benchmark rate below its already record low level of 0.5 percent - where it has sat for four years - is probably not on the list of policymakers at the central bank, for several reasons.

Carney himself noted the concerns of the Bank of England's top policymakers that a rate cut might be counter-productive when he made his only detailed assessment so far of Britain's economy, in an appearance before lawmakers in February.

The bank has argued that a further cut would hit the profits of Britain's building societies - mutually-owned mortgage lenders - and possibly hurt an important source of credit in the economy.

"We need our building societies. As banks' appetite to lend has fallen, the societies now provide 22 percent of gross mortgage lending compared with 13 percent in 2009," Jim Leaviss, head of retail fixed interest at M&G Investments, said.

Another big hurdle to a surprise cut in rates would be the steady opposition from a majority of the Bank of England's rate-setters to fresh measures to spur the economy.

Six of the nine members of the Monetary Policy Committee (MPC) have voted in each of the past three months against expanding a programme of government bond-buying, the bank's most aggressive weapon to date to prop up demand.

The bank's most recent move to help the economy has been to expand its Funding for Lending Scheme, trying to increase lending by banks to small and medium-sized firms which have complained about problems in getting credit.

The blunter option of a benchmark rate cut would be a major shift and none of the more than 60 economists polled by Reuters on Wednesday predicted one in the year ahead.

"The first hurdle you have to get over is that you have to persuade the MPC that there needs to be more loosening anyway," said Simon Hayes, an economist at Barclays Capital. "For me, that is the biggest impediment to anything more interesting on the policy front."

One option that Carney might be tempted to put to the MPC is a more targeted cut in the 0.5 percent interest rate that the Bank pays banks for parking their reserves at the central bank, without changing the benchmark rate.

This might encourage banks to lend more to companies for investment, helping economic growth.

Hayes said speculation about such a move was probably why rates in the overnight sterling market were below 0.5 percent. But there were some concerns about the legal implications of decoupling the rate used in financial markets from the bank's benchmark rate, he said.

(editing by David Stamp)

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