Bank of England signals likely cut in interest rates

Sterling was marked lower on the foreign exchanges yesterday after the Bank of England signalled it was likely to cut interest rates again in response to the cooling economy and sterling's strength against the euro.

With unemployment on the rise and wage inflation continuing to ease, City economists believe there may be scope for the bank to reduce its repo rate from 5.5 per cent to 5 per cent by the middle of the year.

The euro-Euro-sterling rate strengthened 0.40p from 67.55. Minutes of this month's meeting of the Bank of England's monetary policy committee, published yesterday, showed that eight of the committee's nine members voted to leave the bank's repo rate on hold at 5.5 per cent.

Academic economist Mr Willen Buiter was the odd one out, voting for a 0.40-point reduction to 5.10 per cent. After the Chancellor, Mr Gordon Brown's annual budget last week, markets had come to the belief that 5.5 per cent could mark the bottom of the British interest rate cycle.

However, this belief was challenged yesterday by the MPC minutes highlighting the need for a 25-point reduction to 5.25 per cent if sterling's rise against the euro was not reversed sharply.

In addition, the committee noted that economic indicators suggested lower-than-expected activity and inflation, justifying a further reduction in interest rates, possibly to 5 per cent.

An increase in unemployment disclosed in official figures out yesterday fitted the picture of cooling economic activity. The so-called "claimant count" - the number of people claiming unemployment benefit - rose slightly by 4,300 to 1,311,000.

The "ILO rate", based on the International Labour Organisation's formula for calculating the number of economically active people out of work, increased by 6,300 to 1,839,000. In themselves, the unemployment figures are not significant.

However, the bank's MPC and City economists will be surprised if the jobless do not increase in coming months in response to weakening economic activity.

Moreover, wage inflation is ebbing. The annualised rate of earnings growth eased 0.2 to 4.3 per cent in December, just below the 4.5 per cent rate seen as necessary by the MPC to achieve the 2.5 per cent inflation target set by the British government.