The UK's inflation rate held close to a record low in February, giving the Bank of England scope to ...
The UK's inflation rate held close to a record low in February, giving the Bank of England scope to cut interest rates further as economic growth slows.
Consumer prices, ranging from food to clothing, rose 1.9% from a year ago, the lowest increase since records began in 1976.
After leaving base rates unchanged at 6% since January 2000, the Bank of England announced an interest rate cut of a quarter of a percentage point, to 5.75%, at the end of the Monetary Policy Committee's (MPC) monthly meeting on 8 February.
The cut, which was widely expected, followed the Federal Reserve's decision, in the face of growing evidence of a US economic slowdown and fears of a recession, to lower US interest rates by a total of 1% in January.
The UK economy has enjoyed an unprecedented period of stability recently, with the Bank of England able to resist tweaking monetary policy for some time.
But analysts see a further rate cut in the near future as a firm possibility, particularly since an April or May reduction could be seen as politically awkward so close to the spring general election.
Sharda Dean, a UK and eurozone economist at Schroders, says the company is expecting three more cuts, of 25 basis points each, by August.
She says: "There may be difficulties with the planned elections in May but we think more rate cuts are likely."
According to Dean, the UK would have probably needed interest rate cuts even without the US slowdown.
She says: "The MPC tends to follow what the market thinks. It is pre-emptive and needs to act quickly."
Richard Turnill, group economist at Merrill Lynch Investment Managers, only expects one further rate cut by mid-year.
He says: "We are looking at one more cut by August and then it will be a wait and see policy. The housing market is turning around and business and consumer confidence is strong."
Turnill recognises the UK economy, in isolation, is in a strong position but says it is the consistent low level of inflation, which is below stated targets, that is putting pressure on the Bank of England.
Hugh Priestley, chief investment officer at Rathbones, says he has felt since February that a further cut is highly likely.
Export numbers to the US from the UK at the end of 2000 showed a 10% fall. Some commentators argue it is only a matter of time before this feeds through to the UK, although most feel that UK monetary policy is flexible enough to cope.
However, Priestley points out the UK market is still looking attractive while valuations and yields appear reasonable. Rathbones has a marginally overweight stance towards the UK in light of this viewpoint.
Although the UK market is still performing well, some economists say the US slowdown is starting to have a knock on effect on UK exporters.
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