| Bank of England in 0.25% rate cut |
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| Thursday, 07 February 2008 | |
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The Monetary Policy Committee has voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.25%, as was widely expected.
Edward Menashy, chief economist at Charles Stanley Stockbrokers said that with both the UK consumer and the Government deeply in debt, a lot depended on rising exports to add much needed demand into the economy. He added that such a strategy required sterling to remain as competitive as possible and hence for interest rates to be as low as possible. “Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation," Menashy added. He said that an economic slow down could result in higher unemployment and threaten what is already a weak housing market with the possibility of a US style housing collapse happening in the UK. Deteriorating prospects for output growth If the UK was to decline into a recession, leading economists estimate that the Government will have to borrow £100bn per annum. "Hence a recession must be avoided at all cost. The Government must be grateful that the institutions continue to finance the budget deficit," Menashy concluded. The MPC said that prospects for output growth abroad had deteriorated and the disruption to global financial markets had continued. In the United Kingdom, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased. "Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect. These developments pose downside risks to the outlook for inflation," according to the Committee. Impact on inflation CPI inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months. The lower level of sterling will boost import costs. The impact on inflation should begin to fade later in the year, but measures of inflation expectations are currently elevated. The MPC concluded that these developments pose upside risks to the outlook for inflation further ahead. Given this outlook for inflation, some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term. The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target. Against that background, the Committee judged that a reduction in Bank Rate of 0.25 percentage points to 5.25 per cent was necessary to meet the 2 per cent target for CPI inflation in the medium term. Immediate relief for borrowers The Council of Mortgage Lenders (CML) welcomed the reduction which it said would provide immediate relief for borrowers with mortgages tracking the base rate. Michael Coogan, CML director general, said the decision was good news for the quarter of UK borrowers on tracker rates who will see an imminent reduction in rates. He warned, however, that borrowers should not expect that a base rate reduction would automatically result in a cut in standard variable rates or discounted rates across the market. "Lenders’ rate setting policies are more complex than simply the level of the base rate. They are determined by a range of factors including the cost of retail funding and the cost and availability of wholesale funding,” Coogan concluded. The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 13 February. The minutes of the meeting will be published on Wednesday 20 February. Related articles
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