Interest rates may fall as the pound slips downwards

Aug 13 2008 by Alex Turner, Liverpool Daily Post

STERLING reached its lowest point against the dollar since November, 2006, yesterday as new figures on UK retail sales and house prices hinted at an interest rate cut this year.

The pound fell 0.5% below $1.90 before rising slightly. However, it has been falling steadily for two weeks, from above $2, and is more than 10% below its year-high of $2.11, reached last November.

Despite the rise in inflation to 4.4% – the highest since the Bank of England became independent in 1997 – analysts believe that other data make it much more likely that rates will be cut, rather than raised.

The falling oil price is key to the reduction in inflationary pressures. Oil is more than $30 off its July peak, and on Tuesday hit its lowest in over three months.

Even after the inflation figures were released, interest rates futures markets attached around a 15% chance the Bank of England will cut rates to 4.75% in December, and a more than 50-50 probability rates will be cut in February. Last week, markets weren't betting on any rate cuts this year at all.

“Our central view is that they will cut rates early next year, but that could be brought forward,” said Adarsh Sinha, currency strategist at Barclays Capital in London.

The British Retail Consortium said retail sales had fallen 0.9% on a like-for-like basis compared with the previous July, meaning sales have now fallen in four of the past five months. The fall was in spite of the torrential downpours of July, 2007, which badly affected sales.

And figures from the Department for Communities and Local Government showed house prices fell by 0.7% between May and June. The annual rate of growth slowed to 0.6% in June, down sharply from the 3% seen in the year to May.

The average house price in the UK now stands at £215,029, down from £216,625 in May. Howard Archer, chief economist at Global Insight, said: “It seems odds on that house prices will continue to head rapidly south.

“Elevated affordability pressures on potential house buyers stem from high house prices, modest disposable income growth and the squeeze on purchasing power coming from soaring utility bills and high food prices, while very tight credit conditions have led to markedly fewer and more expensive mortgages being available.”

The Bank of England will release its quarterly projections for inflation and economic growth tomorrow. The report is expected to highlight the dilemma facing policymakers as the Bank’s Monetary Policy Committee (MPC) have felt unable to lower interest rates, in order to tackle slowing economic growth, because of the threat to inflation.

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