LONDON (Reuters) - Interest rates are likely to come down next month to safeguard the economy but aggressive cuts of the kind announced by the U.S. Federal Reserve are not on the cards, the Bank of England signalled on Wednesday.
Minutes of the Bank’s Jan 9-10 rate-setting meeting showed policymakers were having to balance risks to growth against rising price pressures, a dilemma also highlighted by Governor Mervyn King on Tuesday.
Speaking to a business audience in Bristol, King said Britain’s economy faced its most challenging year in a decade but suggested rapid-fire interest rate cuts were not the answer to financial market woes.
“The deep cuts in rates that the Federal Reserve seems to favour are not for the Bank of England,” said Stephen Lewis at Monument Securities.
The minutes showed only arch-dove David Blanchflower opposed this month’s decision to keep rates at 5.5 percent. Many in the market had expected the decision to be a closer call.
Sterling strengthened and stocks fell after their release at the same time as figures showing the economy grew slightly faster than expected in the final quarter of last year.
Preliminary data showed Britain’s economy grew 0.6 percent in the three-month period, easing from 0.7 percent in the third quarter but still recording the strongest full-year performance since 2004 — growth of 3.1 percent.
Evidence the economy is not decelerating as swiftly as expected in the wake of the credit crisis suggests Britain’s central bank may not need to cut borrowing costs as much as expected this year.
“We stand by our view that rates will come down again next month but barring a sudden deterioration in the growth outlook the Monetary Policy Committee is unlikely to ease aggressively,” said Philip Shaw, chief economist at Investec.
“The fact that GDP growth in the fourth quarter held up relatively well supports that view.”
On an annual basis, the economy grew 2.9 percent in the fourth quarter, down from 3.3 percent in the three months to September. This was the lowest since Q2 2006 but was higher than most analysts had forecast.
The minutes, meanwhile, showed policymakers reckoned downside risks to the economy had risen since its November forecasts but short-term price pressures had also gone up.
Most MPC members were worried that back-to-back rate cuts would send the wrong message to markets and fuel expectations of even faster price rises in the future.
“A second period during which inflation was significantly above target so soon after the one in spring 2007, might be more likely to lead people to revise up their expectations of future inflation.”
Sterling’s sharp recent decline was also exacerbating price pressures and policymakers noted investors were betting on further falls in the currency.
“Movements in the yield curve and the depreciation of sterling had already provided some further monetary easing,” the majority of the committee argued.
In a speech in Bristol on Tuesday evening, King appeared to warn against expecting Fed-style aggressiveness in easing monetary policy.
“Although central banks can and will respond to the consequences of strains in the banking system, the solution to the underlying problem does not rest with them but with the banks and financial markets themselves,” King said.