1% interest rate cut could be on the cards

03 November 2008 / by Rachael Stiles
The Bank of England is being bombarded from all sides by calls for a one per cent cut in the base rate in order to avert a long and drawn out recession.

Economists have accused the Bank of England of acting too late to avoid a recession, and say that it must now act to prevent it being too prolonged, to boost the housing market and encourage high street spending to kick start the economy in the run up to Christmas.

After October's surprise half a percentage point cut, carried out in co-ordination with other economies around the world, it is widely expected that Thursday's Monetary Policy Committee meeting will see more of the same, but there is hope that the MPC will go even further and cut interest rates by a whole percentage point this week.

After several dramatic reductions by the US Federal Reserve, interest rates stand at just one per cent in America, and UK economists would like to see Britain following a similar pattern.

Gordon Brown has suggested that the Bank will fall in line with other global economies, with more rate cuts on the way. Some experts predict that the Bank of England base rate will fall to two per cent or lower – their lowest for more than 300 years.

"The Bank needs to look ahead" Roger Bootle, of Capital Economics, told The Daily Telegraph. "This situation calls for courage. Why on earth do we have interest rates at 4.5 per cent? It is indefensible."

Bank of England governor Mervyn King has been accused of taking too little action too late, and of paying too much attention to the threat of soaring inflation while the credit markets dried up and the economy was crumbling around him.

John Wright, head of the Federation of Small Businesses, said that now is not the time for the MPC to "dilly dally" until the end of its two day monthly meeting on Thursday, and it should act early on Wednesday, as it did last month, so that it "sends the right message", according to the Telegraph.

A one per cent rate cut would mean a £500million saving in repayments for small businesses, he said, providing that the banks pass on the reduction to customers.

He also said that a full one per cent cut would highlight the banks that were "up to their old tricks" by not passing on the benefits of base rate cuts to their customers.

City Index strategist Joshua Raymond has voiced fears that this week's rate cut might not be enough as the stock market continues to struggle.

"Last week's greater than expected contraction in GDP hit the markets hard and most of the gains made this week have been on the back of next week's impending rate cut. We have also had the weakest consumer confidence figures in 34 years which does not put the UK in good stead for the Christmas shopping season. The UK needs the MPC to deliver." he said.

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