Bank of England Faces Pressure on Monthly Interest Rate Announcement, but Cut Expected

LONDON (AP) -- The Bank of England makes its monthly announcement on interest rates Thursday, facing pressure from rising inflation, sagging house prices and falling consumer confidence.

Many analysts expect the bank to shave a quarter point from the current rate of 5.25 percent.

Bank of England Governor Mervyn King told a legislative committee last month that a rate cut was probably needed to bolster consumer confidence, and he said he expected inflation to go as high as 3 percent before retreating.

Inflation rose to 2.5 percent in the year through February, above the government's 2 percent target, and a cut in rates to boost economic growth could push inflation higher.

With the markets expecting a rate cut this month, the pound has fallen below $2. It shot above that level a month ago after the bank left the base rate unchanged. Rate cuts can work against a country's currency.

The bank's key rate hit its recent peak of 5.75 percent in July and stayed there until December. The last time the rate was as low as 5 percent was November 2006.

The Bank of England's head of markets, Paul Tucker, last week said rates would fall "gradually" and that the central bank was prepared to tolerate increased slack in the economy to counterbalance inflationary pressures.

The bank's credit conditions survey published last week revealed that demand for prime lending for house purchases was weaker than expected in the fourth quarter.

"The survey presented a bleak picture of reduced credit availability to households and corporates, with expectations of a further squeeze on funds over the next three months," said Philip Shaw, chief economist at Investec Securities.

"The credit squeeze continues to pose significant downside risks to the economy and this has been accompanied by comments from the Bank expressing increasing concern."

This week's downbeat economic news included a report that house prices in Britain fell 2.5 percent in March, though they remain above year-ago levels, and Wednesday's report from the Nationwide Bank that consumer confidence had fallen to the lowest level since its monthly survey began four years ago.

Banks have tightened up on mortgage lending, withdrawing past generous offers to finance 100 percent of the purchase price.

"New mortgage lending and home sales should continue to ease, putting further downward pressure on house prices," said Matthew Sherwood, senior global economist at Experian.

"If some pundits are correct and house prices fall by 20 percent, our research shows that more than 78,000 U.K. households would face the daunting prospect of servicing outstanding balances that are larger than the value of their homes," Sherwood added.

Shaw said the condition of credit markets would determine whether the base rate can go much lower.

"The critical determinant will be whether there are signs of normalization in credit markets. If so, there may not be any more downside to rates," Shaw said. "However there are mounting risks that credit conditions will remain dysfunctional for some time to come."

Bank of England: http://www.bankofengland.co.uk/