Bank of England Pressured in Slump to Recoil From Rate Change

By Brian Swint and Jennifer Ryan

Aug. 7 (Bloomberg) -- Bank of England policy makers, facing the threat of a recession and the fastest inflation in more than a decade, will probably decide today that the least-worst option is to do nothing.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will leave the main U.K. interest rate at 5 percent for a fourth month, according to all 60 economists in a Bloomberg News survey. The bank announces the decision at noon in London and publishes new quarterly forecasts on Aug. 13.

``The best thing is to sit on their hands for the time being,'' said Grant Lewis, an economist at Daiwa Securities SMBC Europe in London and a former U.K. Treasury official. ``The impact on confidence from a hike would be enormous; to cut would show the bank is less worried about inflation.''

A year after global credit markets seized up, Britain's economy is on the brink of a recession, and King predicts inflation will soon accelerate to more than double the 2 percent target. Policy makers split three ways on which way interest rates should move at the July decision, and economists say the bank's quandary has worsened since then.

``They face an even more intense dilemma than at the previous meeting,'' said Neil Mackinnon, chief economist at ECU Group Plc. ``The outlook has probably deteriorated.''

G-7 Rates

The U.K.'s main rate is the highest in the Group of Seven countries. The U.S. Federal Reserve this week kept the benchmark at 2 percent. The European Central Bank raised its rate to 4.25 percent last month and will keep it at that level in a decision 45 minutes after the Bank of England's announcement today, all 60 economists in a Bloomberg survey predict.

With the British central bank likely to stand pat, Prime Minister Gordon Brown may try to shore up the economy with tax changes to benefit consumers. Brown's popularity has plunged after 13 months in office, with his ruling Labour Party attracting 24 percent support in a BPIX Ltd. poll between July 31 and Aug. 2, compared with 47 percent for the Conservative opposition.

U.K. services, manufacturing and construction shrank in July, surveys by the Chartered Institute of Purchasing & Supply showed. Consumer confidence dropped by the most in four years, and house prices fell 8.1 percent from a year earlier, the most since 1991, according to Nationwide Building Society.

Inflation Forecast

Record oil prices and rising utility bills have crimped consumer spending and fanned prices. Inflation accelerated to 3.8 percent in June, the fastest pace since at least 1997. King predicted on July 14 that it will exceed 3 percent ``until well into next year.''

While oil prices have declined 18 percent since the record high on July 11, they are still up 66 percent from a year ago. Centrica Plc, Britain's biggest energy supplier, and Electricite de France SA's U.K. unit announced price increases of as much as 35 percent in the last month.

Policy maker Timothy Besley favored a rate increase on July 10, arguing that faster inflation risks eroding the bank's credibility. David Blanchflower supported a reduction, saying that the economy is likely ``to contract sharply in the near term, possibly for several quarters.'' The majority voted for no change.

``The MPC has got to judge whether the slowdown will be sufficient to push inflation back to target by itself or whether it needs a nudge,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``The best thing they could do is simply do nothing.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.