Friday, 7 December 2007

BoE cuts rates, maybe room for more

The tide turns in UK monetary policy. From Reuters:

The Bank of England cut interest rates for the first time in over 2 years on Thursday in order to shore up the economy in the face of a global credit crunch after a week of feverish speculation over what it would do.

The quarter-point cut to 5.5 percent, which reversed July's hike, was needed, the central bank said, because economic growth was slowing and the state of financial markets was getting worse, piling pressure on both companies and consumers.

In contrast, the ECB is still seriously contemplating a rate hike. Bloomberg reports:

The European Central Bank left interest rates unchanged as policy makers weigh the risks of accelerating inflation against signs of slowing economic growth.

The ECB kept the benchmark refinancing rate at 4 percent today, as predicted by all 62 economists surveyed by Bloomberg News. "Some" members in the 19-member Governing Council voted for an increase, President Jean-Claude Trichet said...

Euro-region inflation will probably average about 2.5 percent next year instead of 2 percent projected in September, according to ECB staff forecasts published today. In 2009, inflation may slow below the bank's 2 percent limit, averaging 1.8 percent.

The OECD would probably have applauded both the BoE and ECB's decisions. From Bloomberg:

The Organization for Economic Cooperation and Development said the Federal Reserve and European Central Bank should avoid cutting interest rates, predicting the world economy will weather the fallout from the U.S. housing slump.

Economic growth in the OECD's 30 members will slow to 2.3 percent in 2008, down from the 2.7 percent forecast in May, before picking up to 2.4 percent in 2009, the Paris-based group said today in its semi-annual outlook. The prediction for 2007 was left unchanged at 2.7 percent...

Unless recession risks intensify, a short-term deceleration in growth doesn't "necessarily" warrant further rate cuts from the Fed after it pared its benchmark to 4.5 percent, the OECD said. Growth will fall only slightly below its long-term trend next year and higher energy costs and a weaker dollar could sustain inflation, the group said...

While the ECB should show "vigilance," the mix of weaker growth and inflation at a six-year high means it should avoid raising or cutting borrowing costs for now, the OECD said...

The Bank of Japan should also avoid lifting its benchmark rate from 0.5 percent given an absence of inflationary pressures and weak consumer spending, the report said. Rates should remain on hold until inflation is "firmly positive and the risk of renewed deflation is negligible," something that may not occur until 2009, it said...

The Bank of Canada should also avoid following this week's rate cut with another, the OECD said.

In contrast, there is room for the Bank of England to embark upon a "series" of rate cuts after inflation slowed through this year, it said...

While China is not a member of the OECD, the group said faster appreciation of its currency would be in its "own interest," with inflation likely to accelerate in 2008 amid another year of double-digit growth.

In other central bank news yesterday, Indonesia's central bank cut its benchmark interest rate to 8 percent from 8.25 percent but South Africa's central bank raised its benchmark interest rate by half a percentage point to 11 percent.

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