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BoE Cuts Rates on Slowdown Fears

The Bank of England cut its main rate by a quarter of a percentage point to 5.5 percent Thursday amid fears of an economic slowdown because of a spillover from the credit crunch.

"Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow," the Bank of England said in a statement.

Sterling fell against the dollar after the announcement, down about 0.2%.

Over the past days, pressure has been mounting on the BoE to ease monetary policy after a string of weak data.

"The bank was never going to win on this … they're panicking and taking a risk on inflation," Andrew Smith, chief economist at KPMG, told "Power Lunch Europe."

"We are looking at least one, maybe two cuts in quick succession," Smith added.

More Cuts Expected

Economists are saying the bank must slash rates further to make sure the economy is not too affected by the financial markets' turmoil.

"I think we're in a farily long period of monetary easing," Jonathan Loynes, from Capital Economics, told CNBC.com, adding that he sees the rates going as low as 4 percent.

The extent to which rates may drop is difficult to gauge just yet, as the credit crunch's conclusion is not yet in sight.

"With growing downside risks for growth, we would suspect rates will be down to just 5% by mid 2008 with the clear risk that they move sub-5% in the second half of the year," ING economist James Knightley wrote in a market note.

Business representatives hailed the move, saying it helped overcome a slowdown in spending.

"Customers and retailers will be relieved the Bank hasn't delayed this overdue rate cut again," British retail consoritium director general Kevin Hawkins told Reuters. "The sooner the Bank delivers the next one the better."

Housing Crisis?

The cut will also help avert a housing crisis.

"This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year," Michael Coogan, director general at the Council of Mortgage Lenders, told Reuters.

The BoE admitted that inflation risks were still present because of food and energy prices, but said they would be moderated by slower growth in spending as consumers' spending appetite was likely to deteriorate.

"Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train," the bank said.

Britain's high home-ownership rate, compared with other European peers, means any shock in the housing market is transmitted more easily into the wider economy.

"If we do get a sharp slowdown in house prices, that is due to have an impact on the economy and ultimately on inflation," Loynes said.

Inflation Risks Balanced

Economists say inflation risks were compensated by the fear of a slowdown, with the latest data pointing to a weakening economy.

"I suspect inflation could be above the MPC's target for a number of months," Loynes said. "But I think that now the MPC expects the economy to slow down quite sharply."

House prices fell for the third month in a row in November, data from largest mortgage lender Halifax showed, signaling the once hot British property market is cooling off fast.

A survey by Nationwide also showed that in November consumer confidence in the UK fell to its lowest level since February, while the British services sector slowed to its weakest in four years in November.

Although the bank's rate cut was not aimed at helping the money markets, where rates have been high over the past weeks as banks are reluctant to lend to each other because of the liquidity squeeze, it is likely to help.

"It brings down the level of money market rates, even if the spread remains the same," Loynes said.

Contact Europe: Economy

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