BoE Likely to Cut, Brown Dismisses Price Fears

The Bank of England will probably cut interest rates to 5 percent Thursday, in the hope of alleviating the impact of the credit crunch, but inflation expectations are on the rise, adding to the central bank's dilemma, analysts told


“We are expecting a rate cut of 25 basis points, but I think it will be a close call, not least because of MPC (Monetary Policy Committee) fears about inflation expectations, which have jumped up to record highs,” Amit Kara, UK Economist at UBS, told

But UK Prime Minister Gordon Brown played down worries over the level of consumer price inflation, currently at 2.5 percent and above the official target of 2 percent.

"Because we've got low inflation we can cut interest rates," Brown told BBC News, adding that it meant growth prospects for the UK economy were better than those of other countries affected by what is happening.

However, weakness has continued to spread in the UK commercial and residential property markets since the BoE started to reduce interest rates back in December 2007.

The pace of decline in UK house prices accelerated in March to levels not seen since September 1992, according to data from the UK mortgage lender Halifax.

Trouble Spreading

The effect of the credit crunch has until recently been localized to financial corporations, but now many UK mortgage lenders are either withdrawing their most competitive mortgage deals, such as HSBC’s First Direct, or hiking the rate home owners have to pay.

Slowing retail sales and the softening pound versus the euro have also added to the deepening concerns over the strength of the economy, which is running a “real risk of an ugly asset price-deflation story developing,” Kara said.

“Chances are the BoE will look at what’s happening in the UK economy, where downside risks are prevailing,” Jean-Michel Six, chief European economist at Standard & Poor's, told “Power Lunch Europe,” adding that the UK housing market is heading for a fairly significant correction.

“It’s likely to get worse before it gets better,” Kara added when talking about the problems of credit supply for UK real-estate sector.

But despite the obvious signs of trouble, the creeping threat of inflation could become an increasing focus for the torn MPC, although it is likely to be overshadowed at Thursday's meeting.