The end of BOE rate hikes

After a series of aggressive rate hikes over the past year, the Bank of England (BOE) held its repo rate steady at 4.75 percent at its Nov. 4 meeting. Many analysts believe this may mark the end of the tightening cycle in Britain — at least for now. The next meeting is set for Dec. 9.

“The BOE inflation report was a bit less concerned about inflation going forward,” notes Bob Lynch, currency strategist at BNP Paribas in New York. “We do think the tightening cycle is complete.”

Analysts point to signs the housing market is cooling off in Britain as one factor that could keep the BOE on the sidelines in the months ahead.

Housing prices have stopped rising and by some measures have even registered declines in recent months.

Although housing-price inflation still registered a hefty 13.8 percent year-over-year increase in September, actual housing prices declined -0.1 percent during September, according to the UK Office of the Deputy Prime Minister (ODPM). However, the key point for the BOE is “the rate of increase has decelerated substantially,” Lynch says. “We had been seeing price increases at a 20-percent per year rate.”

In terms of overall growth in Britain, Kathleen Stephansen, director of global economic research at Credit Suisse First Boston, says the economy isn’t doing too badly. While a soft patch was seen in the third quarter with a 2.2-percent growth rate, Stephansen forecasts overall GDP growth at 2.8 percent in the UK in 2005. BNP Paribas’ official forecasts for 2005 GDP growth are slightly lower at 2.5 percent. “They’ve had a very strong economy over the past few months,” says Tom Rogers, senior currency analyst at Thomson Financial. “They are growing stronger than the rest of Europe.”

In other economic news, the UK trade deficit narrowed sharply in September to 4.5 billion pounds from 5.2 billion pounds. Analysts point to an 11-percent jump in exports to non- European Union countries as the key factor behind the shrinking gap.

Broad-based improvement occurred, with impressive gains to Asia, including a 15-percent increase to China and 27-percent increase to Japan.