LONDON, Feb. 6 (UPI) -- The Bank of England's Monetary Policy Committee surprised financial markets Thursday morning by deciding to cut the Bank's repo lending rate -- the benchmark short-term lending rate in Britain -- by a quarter of one percent to 3.75 percent.
The cut was unexpected. Though growth in Britain has shown signs of slowing, the economy, which expanded at an annual rate of 2.2 percent in the fourth quarter, remains far from recession. On the other hand, there has been considerable concern, expressed, not least, by the Bank of England, about the pace at which British house prices have climbed. According to the Nationwide building society, the average annual rate of inflation in British house prices in January was 26.5 percent.
The Bank of England committee justified its decision, however, by pointing to the danger of a weaker economy.
"Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated," the monetary policy committee's statement said.
The Bank also chose to ignore a recent uptick in the inflation rate. The index tracked by the Bank, the RPIX -- retail price inflation excluding mortgages payments -- rose to 2.9 percent in January, above the Bank's 2.5 percent target, but the bank argued in its statement that "this is the result of temporarily large contributions from petrol prices and from housing depreciation. These influences on inflation will persist for some time but are expected to unwind further ahead."
The Bank's medium-term aim is not to keep inflation below its 2.5 percent target but to hit that target, which might not be the case were the economy to weaken.
But its decision to cut rates now, when inflation remains above target, will be controversial. The British economy is divided between weakness and strength, with industrial production falling as worldwide demand slackens, while retail sales keep growing and house prices rocket.
Like U.S. Federal Reserve Chairman Alan Greenspan, the Bank is acting now in pre-emptive fashion. The danger is that this will give further steam to house prices, exacerbate the imbalances in the economy and leave less room for maneuver in the future.
Although the British economy has grown more strongly than those of either France or Germany in recent years and eluded the recession suffered by the United States in 2001, there remains doubt over whether the Bank of England's accommodative monetary policy making has been wise or is storing up problems for the future.
