February 12, 2003	Wednesday	Zul Hijjah 10, 1423

LONDON, Feb 11: The Bank of England’s quarterly inflation report, due out on Wednesday, is one of the most keenly awaited in many years and will be studied closely for clues about whether money will get cheaper still in the coming months.

The BoE’s Monetary Policy Committee totally wrong-footed almost all economic pundits last week with a surprise cut in its key repo rate to a 48-year low of 3.75 per cent. They had expected rates to remain at 4.0 per cent for the 15th month.

In a brief statement accompanying Thursday’s decision, the MPC said it was concerned about the risks that domestic and overseas demand could weaken and that the current rise in inflation to above its target would likely be temporary.

But economists, vexed at being taken by surprise, will be seeking answers from the tome-like document which will be released at 1030 GMT, just as deputy governor Mervyn King begins a news conference to explain it.

“Last week’s surprise move by the Bank of England will remain clouded in mystery at least until Wednesday’s Inflation Report, and perhaps even after that,” said Danny Gabay, economist at JP Morgan in London.

The key parts of the report will be two “fancharts” which give the nine-member committee’s best guess as to where economic growth and inflation are headed.

What is clear is that the committee’s November growth forecast, which was seen by many as too optimistic, will be revised down from around three per cent for this year towards the 2.2 per cent consensus among independent economists.

The forecast for inflation, however, is likely to be similar to November’s. That showed RPIX, which strips out volatile home loan costs, rising above its government-set target of 2.5 per cent, for most of this year, falling below it for most of 2004 and then hitting target in two years’ time.

The new forecast is likely to be similar, but only because of the rate cut. King will argue, as the MPC did last week, that the cut was necessary to prevent RPIX being below 2.5 percent at the end of the horizon.

“At least a majority on the MPC do not share our concerns for the medium-term stability of the UK economy, and instead are far more focused on the near-term risk of growth slipping back below trend,” said Gabay.

Many economists feel they had been misled by key BoE officials, not least Governor Sir Edward George, who said on January 21 that, for the MPC to cut rates, global and domestic demand would have to slow very sharply, which did not obviously happen between then and February 6.

“Clearly, something had happened between 21 January and 6 February to change the Bank’s view on interest rates. One possibility is that the Bank’s economists finished work on their quarterly forecast, finding demand would undershoot previous projections and that inflation would be weaker than anticipated,” said Stephen Lewis at Monument Securities.

“(But) the most striking feature between 21 January and 6 February was the unrelenting decline in UK equity prices. The MPC’s rate cut might well be seen as part of a multi-pronged approach to minimising the risk of market meltdown.”

Pundits will also try to work out from the report how many of the committee may have voted for the cut, although the minutes of the meeting are not out until next week.

King, who takes over from George in July and has a reputation as a rate hawk, may well be defending the inflation report’s forecasts even though he voted against a cut.

Also out on Wednesday, an hour ahead of the inflation report, will be data on unemployment and average earnings.

The average forecast from economists is that the claimant count measure of joblessness could show another small fall, posting a fresh, 28-year low and emphasising the strength of the domestic economy, for now at least.—Reuters