By Christina Fincher
LONDON, April 3 (Reuters) – Investors scurried to bet on a British interest rate cut next week after data on Thursday pointed to a slowdown in the services sector and the Bank of England warned the credit squeeze was likely to intensify.
Deutsche Bank and Bank of America tore up forecasts that the central bank would hold fire at the April rate-setting meeting meeting and money markets also moved to price in a better than even chance of a 25 basis point cut to 5 percent.
“As a result of today’s news we have changed our view — the stars have aligned for a rate cut,” said George Buckley, chief UK economist at Deutsche Bank.
“It is important for the Bank of England to be forward looking and this latest news suggests that the credit crisis is likely to produce further weakness in the real economy going forward.”
The Bank of England credit conditions survey showed lenders expect to reduce the availability of secured credit to households even more sharply in the second quarter of the year than in the first.
Its findings were published at the same time as a survey showing Britain’s service sector slowed more sharply than expected in March.
“These data add to the picture of an economy that is slowing and beginning to feel the effects of the credit crunch more fully,” said Michael Hume at Lehman Brothers.
“As such, we are now more confident in our call that the Bank of England will lower the Bank rate next week.”
CREDIT DAMAGE
A Reuters poll on Thursday showed 48 of 63 economists expect UK interest rates to be cut on April 10 as policymakers attempt to shore up the economy in the wake of the credit crisis.
The rest said the Bank would ease policy in May. This compared with just 22 of 56 forecasting the MPC would cut rates in April in a March 20 poll.
“We had previously argued that the Bank of England would wait until May before cutting rates again due to concerns about inflation,” said Matthew Sharratt, an economist at Bank of America.
“But with the repo rate currently still slightly restrictive at 5.25 percent … there seems little need to delay an already impending rate cut.”
Speaking late on Wednesday, Bank of England policymaker Paul Tucker noted credit conditions had “tightened significantly” over the past two months.
However, he also noted that inflation risks stemming from commodity prices and a weaker pound meant the Bank could not afford to offset the full impact of the credit squeeze.
He gave few clues on how he would vote next Thursday, saying it would depend on the flow of data.
While forward-looking indicators are generally painting a gloomy picture, many activity indicators remain robust. Figures last week, for example, showed British shops enjoyed far stronger sales than expected in February.
Economists, however, question for how long retail sales will hold up when access to credit is tightening and the housing market is weakening.
Approvals for new mortgages are hovering at their lowest for nearly a decade and surveys show house prices have fallen pretty consistently since the end of last year.
But the Bank will have to swallow hard before it cuts. The chosen measure of UK inflation was running at 2.5 percent in February, significantly above its two percent target.
