UK cuts rates as ECB decides against change

The Bank of England, Britain's central bank, cut its base lending rate yesterday by an unexpectedly large 0.5 percentage point to 5.5 per cent, citing flagging consumer demand, weak prices and an uncertain international outlook.

Denmark, which, like Britain, is not a member of the European single currency, also cut its base rate.

But the European Central Bank, which conducts monetary policy for the 11-country euro zone, decided its rates would remain unchanged. Mr Wim Duisenberg, ECB president, said: "The outlook for price stability within the euro zone remains favourable."

He warned that high wage settlements and lax fiscal policies could rekindle inflationary pressures. However, he said further falls in import or producer prices could lead to an accompanying decline in euro zone inflation, which stood at an annual rate of 0.8 per cent in December.

The recent fall of the euro against the dollar was "a matter of puzzlement but not a matter for concern".

But he also said he would fight proposals for an exchange rate regime for the euro that might be inconsistent with the ECB's primary goal of price stability. He said the issue would be discussed at a meeting of the Group of Seven industrialised countries on February 20th in Bonn.

He said there had been signs of a slowdown in growth recently but that, so far, there were no "clear signals" that output growth had slowed by more than expected.

In Britain, the Bank of England's monetary policy committee said its projections called for a further cut to keep underlying inflation in line with the government's target of 2.5 per cent. Underlying inflation in December was running at an annual rate of 2.6 per cent and is widely expected to weaken in the next few months. The bank publishes its latest inflation report next Wednesday and City analysts said the larger-than-expected reduction was needed to put the report's forecast on course to hit the inflation target.

Mortgage lenders reacted to the decision by immediately cutting their own rates, with most fully matching the bank's move. The London equity market was initially enthusiastic, with the FTSE 100 index initially rising strongly. The rally stalled later following gloomy sentiment in the US. By cutting rates at each of its last five monthly meetings, the monetary policy committee has now reduced the bank's securities repurchase rate by two percentage points since the beginning of last October, when it stood at 7.5 per cent.

British business and union leaders were quick to congratulate the bank for its robust attitude. The Confederation of British Industry, which had called for a half-point cut, said: "By giving a lift to business and consumer sentiment, it should help to ensure that the economy moves up from first gear during 1999."

Many economists thought the bank might delay any further cuts for one or two months, better to judge the economy's direction.

The Danish central bank moved to cut its key lending rates because of a strong inflow of foreign currency into the krone, which had strengthened against the euro in recent days. The 0.25 percentage point cut, Denmark's fifth inside three months, brought the repo rate to 3.5 per cent.