Wednesday, December 21, 2005
Bank inches towards a rate cut
Posted by David Smith at 03:00 PM
Category: Thoughts and responses

The December minutes of the Bank of England's monetary policy committee showed an unexpected vote in favour of a cut in rates, by Steve Nickell. That and Charlie Bean's dovish remarks in an interview with me at the weekend means the odds have shortened significantly on a February rate cut.


mr david smith

i really did not expect another rate cut but it certainly seems likely now.where do you see cable in the coming months?
fair value may be in the 1.55-1.60 range.
britain does not have the massive imbalances we see in the usa nor the rigidities of europe so would you expect cable to hold above 1.70?
additionally would you expect britain to outperform europe in 2006?

Posted by: richard at December 21, 2005 04:01 PM

On the other hand, the housing market casino seems to be welcoming new punters and consumers are giving their credit cards an outing to the shops again.

Retailers wonít make the same mistakes as last winter. Although the December CPI annual inflation rate is bound to fall, itís the February figure published in March that will give the first real indication of whatís really happening to inflation.

Posted by: Sandid at December 22, 2005 10:12 AM

FWIW my company is one of the panel companies visited by the BoE agents, and in our most recent visit we discussed the disparity of what we were seeing on the ground and the more upbeat talk coming out of London. It did lead me to wonder whether some of the more positive talk was in itself aimed at calming the markets and part of the route to a soft landing.

Footfall LFL in the city centre shopping centre where I am has been consistently down by 5-8% in recent weeks, a pattern colleagues report in cities elsewhere in the uk. Sales have been broadly neutral indicating people are visiting less but spending more per visit. Some stores are doing ok (Tesco's and M&S appear to be going like a train for example), whereas others have trading running from poor to dire (the signals from the likes of eg Boots, MFI and B&Q are particularly downbeat). Something very strange is going on and it has an awful lot more downside than upside in my view - flat spending at best coupled with a major structural realignment in the marketplace. Casualties in the New Year seem inevitable - and if the fear factor kicks in then there is a danger of a domino effect.

So no surprise that the Bank is cautious - surely Charlie Bean does not come out with views as he has done with yourself David by accident. So I think you are right.

If you have read this far then may I make a plea for a New Year article on exchange rates. I know you have said that you don't like to call rates, but an analysis of the factors would be helpful. Charlie Bean said earlier this year that the banks view was that on fundamentals the dollar was way overvalued with a more realistic rate being $2 to $2.20 or lower. He also said that that did not mean that the rate would fall (prophetic since it subsequently strengthened) - only that it should do based on an an analysis of the fundamentals (ceteris paribus which they clearly were not). If UK interest rates fall in February, and USA rates continue to increase, it would appear that a dangerous misalignment will build further with massive implications when it unwinds?

As an adjunct to this, if it does collapse - what are the implications for the oil price given that oil is traded in dollars worldwide? Will it automatically rise in dollar terms to reflect the devaluation?

Your views would be welcome - here or in an article.


Posted by: David Brown at December 22, 2005 08:33 PM