Decision change: Rate cut in December
18 Nov 07

Up till now, I had been forecasting 2 successive rate cuts in January and February. But I feel that a rate cut is now likely in the next meeting in December.

Until now, it was simply talk about lower growth expectations but no hard data to prove it. Mervyn King, the Governor of the Bank of England said in the November Inflation Report that a change was “not a matter of time but of data”. But now, figures are starting to come through which are showing:

• Dipping consumer confidence
• First fall in retail sales for nine months
• Unemployment has edged up
• Financial markets are a little edgy and could be for a while

In the near term, there may be some upward pressures on inflation from food and oil prices, but in the medium term, the Bank of England expects the rate of inflation to settle around the target. There are serious concerns over UK GDP growth rate and a sharp slowdown is predicted in early 2008. Lehman Brothers has reduced their GDP growth forecast for 2008 from 2.3% to 1.7%. The slowdown is starting to show up in lower consumption figures – the first fall in retail sales in nine months was seen in October.

However, I do realise that the consensus among economists in the city is that a rate cut will come very early next year instead of December. But we can argue for pre-emptive action as we expect growth to slow down sharply - we're not going to wait for it to happen and then simply react, we're proactive.

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