Bank set to cut rate this week

The Bank of England is poised to cut its base rate this week, say City economists. But the weakness of the pound may yet postpone the decision.

Manufacturing employers are still appealing for a 0.25 per cent reduction to 3.5 per cent when the Bank's Monetary Policy Committee makes its decision on Thursday.

Money markets have already factored in a 90 per cent chance of such a cut this week, and a slim majority of City economists predict that this will happen.

The pound has slipped to its lowest levels against the euro since January 1999 as currency markets factored in a lower yield on holding sterling.

'Whether or not the Bank takes a more upbeat view on activity next year, weaker growth this year alone should prompt a 0.25 per cent rate cut,' says Adam Law, UK economist at Barclays Capital. The British economy grew by an anaemic 0.2 per cent in the first quarter of this year.

This week's MPC meeting coincides with the quarterly compilation of a new Bank forecast for growth and infla tion, the last to be written with Sir Edward George as Governor.

The Bank last cut rates in February, at the time of its most recent Inflation Report . But the month of publication has also thrown up surprise changes of direction in policy.

Inflation remains at five-year-highs above 3 per cent, and the 10 per cent fall in the pound so far this year will worsen this outlook.

'The MPC's anti-inflation credibility will be eroded if it keeps easing with inflation rising well above target,' says Michael Saunders, economist at Citigroup, who believes the Bank will stay put.

The hawkish elements are likely to be led by Sir Andrew Large and Paul Tucker, who will point out that rates are already at a 48-year low.

Industry, however, wants more help. 'Manufacturers will look to the Bank to take decisive action to ensure, at the very least, that the UK's growth prospects for the rest of this year are not extinguished completely,' said Martin Temple, of the Engineering Employers' Federation.

The European Central Bank and the US Federal Reserve will also decide on rates this week. Both are expected to make no change.