Concern among central banks that world tensions will have a negative effect on business and consumer confidence was behind the decision to drop the Bank of England base rate (BBR) recently, according to Bristol & West.
Laurence Sanders, economist at Bristol & West, admitted the drop had confounded both analysts and the money markets.
He pointed out in Experti, Bristol & West’s economic round-up, that in late January, Sir Edward George, governor of the Bank of England, criticised analysts and economists for being too gloomy about economic prospects. However, he admitted the prospect of war is casting a pall over the world’s economy.
‘The rate increase can be seen as an insurance policy against a decline in consumer and business confidence, as a result of international tensions,’ said Sanders.
As to the near future, Sanders said: ‘The next move in the base rate depends on the outcome of the Iraqi dispute. A quick solution, diplomatic or military, would see the base rate remain at 3.75% until the autumn, when the base rate would be raised back to 4%. Any other outcome could see the base rate reduced to 3.5% or lower.’
However, he pointed out that in general the economic outlook for the UK was not too gloomy, once the downward trend of the political factors was stripped out.
Inflation is expected to remain at just over 2.5% and economic growth just below 2.5%. Politics aside, Sanders suggested this would result in an unchanged monetary stance.