City forecasts 0.25% rate cut

A QUARTER-POINT cut in interest rates is highly probable next month, following last week's good news on inflation, according to City economists. But they say the outlook of the British economy remains poor.

The City is convinced the quarter-point cut in base rates can follow the next policy meeting between Eddie George, Governor of the Bank of England, and Chancellor Kenneth Clarke, on March 7.

But hopes that rate cuts can restore fragile demand are less unanimous.

HSBC, the Midland Bank parent company, is bearish on retail sales. For the January figures, out this Wednesday, economist Don Smith forecasts a fall of 0.7 per cent, although the market expects growth of 0.1 per cent.

Most analysts are united on one factor: if growth is weak, inflation has been tamed, at least temporarily. Inflation fell to an annual rate of 2.9 per cent in January, from 3.2 per cent in December - although some fears about growth in the money supply remain.

Nor can good news on unemployment do much to alleviate fragile confidence at home. Households still fear job losses, in the current fluid employment climate.

If the nation's shoppers fail to boost the economy, evidence that the manufacturing sector can fill the gap is in short supply. "It looks as if manufacturing could be moving into re- cession," said Mr Smith. Manufacturing output in November and December fell 0.7 per cent, despite overall growth of 2.3 per cent in 1995.

Meanwhile, activity in the housing market remains sluggish. Building society economists are doubtful if rate cuts will stimulate activity. Martin Ellis, economist at Woolwich Building Society, believes rate cuts will have little impact: "Every quarter-point cut helps, but the main factor is wages, and there is little to show they will change enough to have a significant impact on house prices," he said.

Peter Warburton, economic adviser to Robert Fleming, is bearish about 1996: "Economic growth could slow to no more than an annual rate of 1 per cent."

But there could yet be some stimulus from special factors, notably payouts from building society conversions, which could hit pounds 14.5bn next year.