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Bank of England to cut interest rates to record low

Monday, 1 December 2008 8:57 AM

The Bank of England is expected to cut interest rates to record low this week, as poor economic data was released yesterday.

The monetary policy committee will sit down on Wednesday for its two-day meeting amid falling house prices, mortgage lending equalling record lows and UK manufacturing stalling, as firms fail to take advantage of the low pound as international demand weakens.

For industry, the CIPS purchasing managers index (PMI) dropped to a record low yesterday.

"There is little to cheer in today's figures," said Charles Davis, economist at the Centre for Economics and Business Research (CEBR).
"The sobering picture painted by the survey of UK manufacturers suggests the sterling depreciation is doing little to help them in the short term.

"Further to this constraints on bank lending are putting firms under even more pressure to stay afloat."

With these pressures and the UK inflation set to fall, Mr Davis predicts a one per cent cut in interest rates on Thursday to two per cent.

"The collapse in inflationary pressures combined with such compelling evidence of problems in the real economy are likely to push the Bank of England into a 100 basis point cut on Thursday," he said.

"This would take rates to their equal lowest in the bank's history dating back to 1694."

Mr Davis added further pressure will come on MPC from PMI figures for construction and services.

Ross Walker, economist at Royal Bank of Scotland, predicts a 0.75 per cent interest rate cut on Thursday - with further cuts for January and February.

"We've pencilled in a cut of 50 basis points in January and 25 in February so that brings us to 1.5 per cent by the next inflation report," he said.

"Even then there are still risks. Everybody seems to be expecting the US Federal Reserve to cut to 0.5 per cent next month.

"If that happens there is a possibility that the Bank of England could be in their slip stream. It's clear we are going to see big reductions, but there is uncertainty over where we will get to and how."

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