Bank seen cutting interest rates in June

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In a poll carried out April 29-May 1, 45 of 65 economists predicted rates would fall to 4.75 percent by the June meeting, with 40 of those predicting the cut would come in June.

Asked to assess probabilities, economists gave a median 70 percent likelihood that rates would fall by June and a 95 percent probability they would drop by the year-end. This compares with 65 percent and 95 percent respectively in an April 10 poll.

The central bank cut rates by 25 basis points in April after making a similar cut in February. These followed a reduction in December also by 25 basis points, the first cut in two years.

Median forecasts showed the Bank Rate dropping to 4.75 percent by mid-year, to 4.5 percent by September, and then once more to 4.25 percent early next year.

A separate Reuters on April 23 poll showed medians at 4.75 percent by June and then at 4.5 percent from September until June 2009. This suggests economists now believe the bank will have to act further and for longer to bolster the economy.

Minutes from the bank's April meeting, released last week, showed the first three-way split amongst policymakers in almost two years. Six Monetary Policy Committee (MPC) members voted for a quarter percentage-point cut, one for a half-point cut and two wanted to hold rates.

"The MPC is divided and many members are reluctant to cut rates. But, given the deepening weakness of the UK housing market, and the growing pressures facing the UK banks, a small cut in rates is clearly needed in May," said David Kern at BCC. "But the decision is very finely balanced, and we would not be entirely surprised if the MPC would prefer to wait for at least another month."

Policymaker David Blanchflower said on Tuesday that house prices, a bedrock of consumer wealth in recent years, could fall by as much as a third and that the British economy faced a real risk of recession.

Approvals for new home loans hit a record low in March while house prices fell for the sixth straight month in April to record their first annual decline in more than 12 years.

Mortgage lenders have been tightening their criteria, even though official rates have fallen, in a bid to maintain profits as it becomes harder for the banks themselves to borrow money.

British rates have not fallen nearly as fast as in the United States, where they have plummeted 3.25 percentage points since September, including a quarter point cut on Wednesday.

RISING PRICES

The BoE said in its Financial Stability Report on Thursday that the scale of losses and the economic fallout from the credit crunch may not be as bad as feared. But inflation remains a worry.

British policymakers are mandated to target inflation at 2.0 percent and BoE Governor Mervyn King has said policymakers face their toughest challenge since 1997 - when the BoE became independent in setting rate policy - as they try to balance rising prices against weaker economic growth.

BoE Chief Economist Charles Bean said last week that inflation was likely to rise above three percent this year as the weaker pound exacerbates the impact of rising commodity prices, and that the market turmoil was lasting longer than previously expected.

Consumer price inflation held steady at 2.5 percent in March, but a poll by Reuters last week found economists forecast inflation at 2.6 percent in 2008.

Britain's economy grew at its weakest rate in three years in the first quarter at only 0.4 percent, growing below the long-term trend, potentially giving the central bank more scope to cut rates.