Predictions of several BoE rate cuts seem over the top

London: Rate cut fever has taken hold of British markets but predictions of as many as three cuts in borrowing costs next year look overdone.

The Bank of England's (BoE) Inflation Report last week sent the pound tumbling to a four-year low against the euro as the central bank forecast a sharp slowdown in economic growth even if borrowing costs were chopped twice over the next year.

Interest rate futures are now fully pricing in two interest rate cuts and possibly a third in 2008. A Reuters poll after the BoE forecasts also showed most analysts looking for two rate cuts next year.

A number of economists are now even predicting the first cut in borrowing costs by next month and newspaper front pages last week screamed that mortgage costs for property-mad Britons are about to fall sharply.

But Governor Mervyn King was much more circumspect when he gave his usual news conference after the publication of the BoE's new forecasts. Everything would depend on the data, he said.

"Disagreements within the Committee are sizeable, both over the central outcome and the distribution of risks around that outcome," said Mark Miller, an economist at Bank of Scotland.

Clearly, King and a majority of his colleagues are not so convinced the economy is about to come off the rails so much that they needed to cut interest rates.

Asked why the central bank had chosen to leave borrowing costs at 5.75 per cent when the outlook was so gloomy, King explained the BoE had in August wanted things to slow down a bit and it still was not sure the current cooling was anything more.

Nor had businesses been complaining that their ability to invest had been affected, he said.

And, most importantly, inflation pressures have not gone away. The short-term price outlook is, in fact, stronger on rising oil prices and the pound's weakness against the euro.