| Bank expected to cut rates by quarter point |
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| Thursday, 07 February 2008 | |
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The Bank of England’s Monetary Policy Committee is widely expected to announce a quarter of a percentage point cut in the base rate of interest, from 5.5 per cent to 5.25 per cent.
The Monetary Policy Committee unanimously voted to cut interest rates by a quarter of a percentage point in December, but left them unchanged in January. The US Federal Reserve announced two drastic cuts in interest rates last month, in what was widely seen as a panic reaction to falling stock markets. Soft economic landing The CBI’s chief economic adviser Ian McCafferty said that it was the right time for further quarter point cut in UK interest rates. “Although there are inflationary pressures in the short term, there are clear signs that the economy is beginning to slow. A modest cut now would help ensure a soft economic landing, without undermining the Bank’s credibility on inflation,” he added. Peter Hemington, partner at BDO Stoy Hayward LLP, said last week that opinions were divided over the best response to soaring inflation expectations and the economic slowdown. “Our data suggests that, in contrast to the European Central Bank’s hawkish strategy, tackling short term nervousness with interest rate cuts is helping to maintain growth in the UK economy,” he added. He said that the Bank of England was taking a gamble that inflationary pressures will ease later in the year as the economy weakens. “It is nevertheless unlikely that the Bank of England will follow the Federal Reserve in making drastic interest rate cuts and we expect to see a quarter point reduction,” Hemington concluded. No longer enough David Kern, economic adviser to the British Chambers of Commerce (BCC) said that global and domestic conditions had worsened since the MPC met last month. He added that a cut in rates to 5.25 per cent was now urgently needed and widely expected, but said that this was no longer enough. To counter the mounting threats to the economy, the BCC urged the MPC to cut interest rates to 5 per cent as early as is practically possible. "Following the recent dramatic rate cuts in the US, we would welcome a bold UK move on Thursday. But, if this is thought to be too risky because it may be seen as signalling panic, the MPC could move to 5 per cent in two rapid steps," Kern said. "It is critical, however, to avoid undue delay. The longer the MPC waits the bigger the danger that the situation will deteriorate, and the policy choices would become more difficult and even more unpleasant later in the year," he concluded. Fragile consumer confidence A cut in interest rates may be widely predicted by economists but consumers increasingly believe that any drop may be short-lived and interest rates will rise again, according to the latest Consumer Barometer from Lloyds TSB Corporate Markets. The survey of 2,000 consumers found that the balance of respondents expecting higher rather than lower interest rates in 12 months’ time grew by 2 per cent in January to 27 per cent. This is the first time the balance has grown after six months of successive falls, suggesting that consumer confidence for the year ahead is becoming increasingly fragile. The shift in consumer perception about interest rates is likely to have been influenced by their increasingly negative view on inflation. According to the survey, the number of consumers who believe that prices have risen over the past year and that prices are set to rise again over the next 12 months has reached survey highs. A record 86 per cent of respondents expect prices to be higher in 12 months’ time, while 79 per cent of respondents believe prices rose over the last 12 months. Job security The uncertainty over the economy has also had a negative impact on consumers’ views on job security. The number of consumers feeling more rather than less secure in their jobs compared to 12 months ago dropped in January to 16 per cent, compared to the six month average of 20 per cent. This is despite official data continuing to reflect a tight UK labour market. Trevor Williams, chief economist at Lloyds TSB Corporate Markets, said that the survey suggested that an interest rate cut may do little to boost confidence in the short run because of the view that it will be reversed within a year. He added that consumers were clearly increasingly feeling the strain of higher prices - energy and food in particular - and that this was starting to convince them that the Bank of England will be forced to keep interest rates high in order to keep inflation under control. “As far as consumers are concerned, any respite granted in interest rates today will be short-lived. Even so, if we do see a cut this will ease the burden of interest payments and as such will help boost economic activity,” Williams concluded. Related articles
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