British interest rates will fall this year, possibly as soon as this month, as the Bank of England tries to energise an economy in stagnation despite high inflation, a Reuters poll showed.
Forty-five of 66 economists polled Sept. 29-Oct. 1 said the Bank of England would hold rates at 5.0 percent when it meets next week, but 21 said they would cut them as growth has come to a standstill and financial markets remain in turmoil.
"October is a 50:50 call — do they balk at a rate cut five days ahead of 5.1 percent CPI or do they decide the financial position is so dire they need to move," said Geoffrey Dicks, UK economist at RBS, who says they will wait until November.
Consumer Price Index inflation, which the BoE targets at 2.0 percent is widely expected to soar even higher above the already high 4.7 percent rate it was in August.
But manufacturing activity shrank during September at the fastest pace since the Purchasing Managers' Index began almost 17 years ago, according to a report by Markit on Wednesday, spurring some calls for a cut at next week's meeting.
A cut by the end of the year is now almost a certainty with forecasters in the poll, mostly taken before the PMI release, predicting a median 80 percent chance of a least one cut, compared to just 45 percent in last month's poll.
Virtually all of them, 56 out of 66, forecast at least one cut by the end of the year.
A poll taken alongside the UK rates survey also saw a median 30 percent chance of major central banks conducting coordinated interest rate cuts this year to stave off recession from choked-up financial markets.
This is up from just a 20 percent chance predicted when the same question was asked of European Central Bank rate forecasters in a poll last week. (See [ECB/INT])
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The BoE last cut interest rates by 25 basis points in April after similar cuts in February and December in an attempt to breathe life into the economy and is expected to continue cutting next year as inflation pressures ease.
Medians from the Reuters poll showed Bank Rate at 4.75 percent by year end, 4.25 by end-March and then falling to 4.0 percent by the middle of the year.
A Reuters poll published in September showed rates holding until early next year when they would drop to 4.5 percent in the first quarter of 2009, fall again to 4.25 percent by June and then round off the year at 4.0 percent.
Minutes from the last meeting of the MPC showed Tim Besley did not repeat his previous calls for an increase while David Blanchflower called for a 50 basis point reduction, signalling the policymakers are heading towards a cut.
"There is a growing realisation that the UK economy is sinking fast and we are of the view that David Blanchflower's gloomy version of events will soon become common currency on the MPC," said Peter Dixon at Commerzbank.
On Monday U.S. lawmakers rejected a $700 billion bailout plan to buy up toxic assets from struggling banks, a move that sent global stock markets tumbling as European authorities scrambled to prop up a slew of banks.
Mortgage lending rose by just 143 million pounds last month, a mere two percent of what was advanced in August 2007 and the weakest growth since the series began in 1993 while mortgage approvals, a key forward looking indicator of housing demand, fell for the 13th consecutive month.
The nationalisation of Bradford & Bingley, Britain's biggest provider of buy-to-let and self-certification mortgages, could reduce the supply of mortgages still further.
