BDO Stoy Hayward predicts imminent interest rate cut

The latest BDO Business Trends Report revealed that optimism and output are weak. As a result, the Chancellor will miss economic growth targets of 3-3.5 per cent, instead posting just 2.2 per cent in the third quarter of 2005.

The minutes of last month’s meeting of the Bank of England’s Monetary Policy Committee (MPC) showed that two of its nine members voted for a rate cut. As a result, there has been much speculation that the first cut in rates may come earlier than expected. And with BDO’s inflation index falling significantly this month, it says that a rate cut now may well be justified.

Despite this, BDO Stoy Hayward expects that the MPC will continue to monitor output and consumer spending patterns for at least one more month. Therefore, it says interest rates seem likely to remain on hold until at least August.

The BDO output index – which predicts GDP movements a quarter ahead – slipped from 100.0 in May to 99.4 in June. The outlook for the manufacturing sector remains bleak; despite increasing by 0.8 points to 97.7 in June the manufacturing output index failed to recover the ground lost in May as it is still below the April level of 98.6. The service sector has also started to falter with service output index falling by 0.9 points this month.

Meanwhile, the BDO optimism index - a leading indicator of GDP growth two quarters ahead - rose from 100.5 in May to 100.9 in June. However, this remains well below the levels recorded in the first quarter of 2005 and would imply annualised growth of just 2.9 per cent per annum in the fourth quarter of 2005. Domestic demand is likely to be weak throughout the remainder of 2005, as uncertainty over the housing market, interest rates and taxes keep consumers from making big ticket purchases.

Inflationary pressures are set to weaken over the coming months; the BDO inflation index dropped 2 points this month to 105.0, way down from 110.4 in January. Consumer price inflation, currently nudging the Bank of England’s target of two per cent, is expected to subside as oil and utility prices rise less quickly.

Peter Hemington, partner at BDO Stoy Hayward says: "The latest BDO ‘poll of polls’ points to a shaky outlook for UK businesses in the second half of the year. With inflation under control, we believe that a cut in interest rates is justified and that the MPC should act now."

Douglas McWilliams, chief executive of the centre for economics and business research added: "Our latest forecasts for the UK economy continue to show signs of a slowdown, with businesses confidence waning as the economic outlook worsens. This decline in confidence is led by fears of a continued consumer slowdown and an end to the Chancellor’s appetite for public spending."