ANALYSTS SAY U.K. BUDGET POINTS TO BASE RATE CUTS
Chancellor of the Exchequer Nigel
Lawson's Budget speech was described as sound and well balanced
by analysts, if slightly lacking in excitement.
    A cut in bank base lending rates is now widely expected
tomorrow, with most forecasts predicting a half-point fall. A
follow-up half-point cut is anticipated next week.
    "Worthy but boring would probably sum it up," Peter Fellner,
U.K. Economist at stockbrokers James Capel and Co, said. "It was
a very, very prudent fiscal budget."
    Richard Jeffrey of brokers Hoare Govett said it was a
well-balanced budget within the confines of the government's
philosophy of keeping expenditure levels flat.
    Most analysts said the Budget was very sound on the fiscal
side, but offered nothing new on monetary policy.
    As was widely expected, Lawson split his "fiscal adjustment"
between trimming the 1987/88 PSBR target to 4.0 billion stg
from 7.1 billion and cutting basic rate income tax from 29 to
27 pct.
    The target for the narrow measure of money supply, M0, was
kept unchangd at two to six pct, while the target for the broad
Sterling M3 aggregate was dropped.
    Both Jeffrey and Fellner said the budget clears the way for
a half-point fall in U.K. Base rates tomorrow, but the
authorities are unlikely to sanction a larger cut immediately.
Many analysts and currency dealers have forecast a full
one-point cut tomorrow.
    "The Bank of England will be loathe to take any action which
it will have to reverse later," Jeffrey said, though he added a
further half-point cut was quite possible in the near future.
    The main worry from today's speech is the outlook for
inflation, given the signs of relaxed monetary policy contained
in it, Scrimgeour Vickers economist Richard Holt said.
    Holt noted the "rather loose" inflation forecast of 4.0 pct
at end-1987, and said the lower interest rates likely to result
from the tough fiscal stance could cause longer term concern.
    "A higher PSBR target could be preferable in the long term,"
he said, although lower mortgage interest rates on the back of
falling base rates would have an offsetting impact on
inflation.
    The Budget will inspire a lot of short-term confidence but
it was "not a good budget for inflation," he said
    Jeffrey said he would have liked Lawson to say more about
the dangers of excessive liquidity build-up but overall was not
too concerned about a revival of inflation.
    Fellner noted that the exchange rate was to remain the
"leading edge" of monetary policy, but said the authorities were
likely to be extremely cautious on this front.
    He said they were unlikely to hesitate in holding interest
rates steady or even raising them again if sterling showed any
signs of excessive weakness.
    Most analysts agreed Lawson had bolstered the credibility
of the Budget by adopting realistic forecasts.
    Raising the forecast for the current account deficit from
1.5 to 2.5 billion stg for 1987 would not unsettle the markets,
which are already discounting that amount, Jeffrey said.
that the 4.0 billion stg PSBR target was given credibility by
the favourable outturn for 1986/87, which is now also forecast
to be 4.0 billion stg.
    But analysts said the Budget speech did not give any
clear-cut indication about the timing of the general election,
which has to be held before June, 1988.
    Some believe it signals a poll this June, noting that the
benefits, such as income tax cuts and the decision not to raise
duties on alcohol and tobacco, become available immediately.
    But others said it kept several options open and it was not
possible to deduce too much from it.
    James Capel's Fellner noted that by being fiscally prudent,
Lawson had kept open the possibility of an autumn election in
that there would be no "chickens coming home to roost."
    Richard Jeffrey, who favours the likelihood of a June
election, said it was important the Chancellor had not gone for
a Budget aimed overtly at buying an election victory.
    Nevertheless, he said, it was likely to result in a boost
to the Conservative Party's pre-election popularity.
 REUTER
