Pressure for interest rate cut

Tuesday, 4 November 2008 2:56 PM

The Bank of England is increasingly expected to take a big chunk off the cost of borrowing this week - with some analysts expecting as much as a one per cent cut in interest rates.

The monetary policy committee (MPC) should make its decision known on Thursday - after October's 0.5 per cent to 4.5 per cent came in a day early as a part of an international wave of rate cutting from the world's central banks.

A second half-point cut is now expected again, but some are calling for a bigger unprecedented reduction.

John Wright, national chairman of the Federation of Small Businesses (FSB), said: "The MPC must send out the right message this week by cutting interest rates by one per cent.

"We are asking for the MPC not to dilly-dally until Thursday and to instead take the initiative early on Wednesday."

He added: "We don't want to head the way of the early 90s when 1,000 small businesses a week were collapsing. This can be prevented if the banks relent and release money, consumers start to spend a bit more and the Bank of England cuts interest rates."

Capital Economics meanwhile expects a 0.75 per cent cut, followed by a 0.25 per cent December reduction.

The body eventual sees interest rates falling to one per cent as the Bank of England takes on the threat of recession.

The MPC's primary target is to reduce inflation to two per cent.

The Consumer Prices Index now stands at 5.2 per cent - but the cost of living is expected to fall following falls to oil prices and as the effect of the hikes in gas and electricity prices disappears out of the statistics.

With inflation now thought to be under control - and even the risk of deflation rising - the Bank is under pressure to cut rates.

Last week Alistair Darling urged the MPC to look at the economy.

Howard Archer at Global Insight sees a 0.5 per cent reduction this week at least, and interest rates falling to two per cent in 2009.

"The question is not will the Bank of England cut interest rates on Thursday, rather how big will the cut be? We expect the Bank of England to match the 50 basis point cut it made on 8 October, thereby taking interest rates down from 4.50 per cent to 4.00 per cent," Dr Archer said.

"However, given the very serious and ever growing danger that the economy will suffer extended, deep recession, we believe that there is a compelling case for the Bank of England to 'get on with the job' and deliver a full one percentage point cut."

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