Lehman Brothers predicts five Base Rate cuts in coming year

Ramesh Sharma

June 1, 2004

Despite a host of lenders predicting small changes to the Base Rate over the next year, Lehman Brothers has indicated a need and opportunity to cut rates up to five times during the next 12 months.

Alan Castle, economist at Lehman Brothers, confirmed in a report: ‘We judge that the Bank of England will end up cutting rates by significantly more than is currently priced into the money market curve.

‘Putting numbers on this call, we look for 25 basis point rate cuts at each of the next five Inflation Report MPC meetings, starting in November 2005 and ending in November 2006. Of course, we would acknowledge that, at least initially, there is unlikely to be unanimity on the MPC for this course of action. However, ultimately, we judge that the majority of committee members will be willing to sanction a more activist policy.’

However, Mark Chilton, chief executive of Purely Mortgages, argued Lehman’s Base Rate prediction may be too optimistic. “That view is a little aggressive, even if the cuts are only a quarter of a per cent each time. However, the general consensus is that by the Summer rates will be at about 3.5 per cent.”

He went on to add: “It’s interesting to see the change in clients’ thinking with more customers opting for a discount rate over fixed because of the suspected rate cuts.”

George Buckley, group economist at Deutsche Bank, revealed there was a whole raft of opinions within the industry on future cuts. He said: “There are significant differences among forecasters as to both the timing and size of future rate cuts. Some believe the August cut was a one-off. Others, including ourselves, expect modest cuts but there are some who see the need for rates to fall towards 3 per cent by the end of next year.”

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