City pundits say rate-cut chances growing

A GROWING number of City economists believe interest rates have peaked, with many predicting the Bank of England will cut borrowing costs before the end of the year to give the flagging economy a boost.

Ten of 12 leading Square Mile analysts quizzed by the Evening Standard believe rates have topped out at 4.75%, double the number six weeks ago. The other two expect the Bank's monetary policy committee to pull the rates trigger at least once more to make sure inflation stays under control.

Of the 10, some say the first cut could come as soon as August while others believe it will not happen until well into next year.

The MPC left rates on hold for a ninth month running at its latest meeting amid signs the High Street is suffering a sharp downturn and manufacturing is struggling. But some experts believe the consumer will bounce back and a lack of spare capacity in the economy will put the Bank's 2% inflation target at risk.

Sir Andrew Large, the Bank's deputy governor, called for an immediate quarter-point rate rise earlier this month. The past few weeks have seen a major shift in rate expectations by economists and financial markets. CSFB, HSBC and Royal Bank of Scotland are among those who have ditched their predictions of higher rates.

Jonathan Loynes at Capital Economiics, who sees the first cut in August and rates down to 3.5% by the middle of next year, said: 'Our forecast is driven by the belief that household spending will continue slowing and other parts of the economy won't be able to compensate.'

George Buckley at Deutsche Bank, predicting cuts in August and November, said there was an increasing danger that weakness in manufacturing and retail would spill over to the dominant service sector.

Robert Barrie at CSFB said: 'We think the MPC has got the measure of the consumer slowdown and the big surprise will be the weakness of the eurozone.'

Malcolm Barr at JP Morgan expects the MPC to raise rates in November, and again next year.

DAVID Walton's appointment to the Bank of England's monetary policy committee does nothing to change the interest rate outlook, analysts reckon. Goldman Sachs economist Walton was yesterday announced as the replacement for Marian Bell, whose term expires at the end of the month.

Her departure deprives the MPC of one of its more dovish members while Goldman's views are on the hawkish side. It expects rates to remain at 4.75% until the end of the year. But, with nine members on the MPC, the majority view will prevail.

Economist Geoff Dicks at Royal Bank of Scotland said: 'Walton's appointment makes no difference. The committee as a whole is more important than any one individual.