Industry hails cut, but wants more next year

THERE WAS a muted reaction in the financial markets - but a welcome from business and unions - for the half-point interest-rate cut to 6.25 per cent announced by the Monetary Policy Committee yesterday. The focus moved immediately on to the outlook for the economy in the next few months and the prospect of the next fall in borrowing costs.

While the MPC's move was greeted with relief by industry, both unions and employers' organisations said further cuts would be needed. Many City analysts have pencilled in the next move for February, and the market expects rates to fall to as little as 5 per cent late in 1999.

Equities were little changed immediately following the announcement, but they slipped later amid growing concern over the outlook for the economy and earnings. A weak opening on Wall Street did little to help sentiment in London, and the FTSE 100 finished the day down 8.8 points at 5,660.3.

Ken Wattret at Paribas said: "The cut is a double-edged sword for equities. It's positive for growth, but it is also official confirmation that the economy is in trouble."

In the bond markets, gilts benefited from safe-haven flows and yields on benchmark 10-year gilts fell by 4 basis points to a record low of 4.45 per cent.

Sterling opened weaker against the German mark, but jumped by more than half a pfennig after the announcement. The pound finished the day at DM2.762, marginally down on Wednesday's close.

Neil Parker at Royal Bank of Scotland said: "Sterling's reaction suggests that people were building in more than a 50 basis point cut. "

Nick Stamenkovic at Bank Austria Creditanstalt Futures said: "You can't rule out a rate cut in January, particularly if Christmas sales are weak. But if there is no move in January, February seems inevitable."

Unions, too, were looking to the Bank's next move. Ken Jackson, general secretary of the AEEU, said: "The MPC has some way to go, but it is on the right track to avoid full-blown recession." But John Edmonds of the GMB union described yesterday's half-point move as a "pathetic" response.

Alan Armitage, chief economist at the Engineering Employers' Federation, said UK rates had to fall further, pointing out that they remain more than twice as high as in the rest of Europe.

The Bank's statement cited weaker prospects for global activity and falling commodity prices as the reasons for the half-point cut, as well as the need to keep inflation on track for its 2.5 per cent target.

The British Retail Consortium said news of lower mortgage payments could help kick-start Christmas shopping. The BRC published figures showing that prices on the high street fell last month to a level almost 1 per cent down on the same time a year ago. Kevin Gardiner, an economist at Morgan Stanley, said: "Last week's European rate cuts underlined the risk of global deflation."

Analysts said this third cut in three months could not do much to boost the economy in the first half of next year, but would help further ahead. "We are going to see very weak growth over the next couple of quarters," said Richard Iley at ABN Amro.

Kate Barker, chief economist at the Confederation of British Industry, said: "It took a long time for industry to lose export orders and it will take a long time to get them back."