Bank of England under pressure to cut base rate

05 December 2007
The Bank of England is under pressure to cut the base interest rate in order to ease the effects of the credit crisis, such as slowing consumer spending, a drop in mortgage enquiries and approvals, and house repossession.

Despite tradition stating that an interest rate cut is the done thing in the event that the monetary system seems threatened, the Bank has stubbornly kept the interest rate at 5.75 per cent since July, after raising it five times in less than a year up to then.

In July, Mervyn King, Bank of England governor, was under pressure to raise rates in order to prevent inflation growing too rapidly, but now he is facing criticism for now cutting rates when the faltering economic system is in need of a more relaxed cash flow. The Libor rate – at which banks lend to each other – continues to hit all time highs, climbing to a nine year record of 6.72 per cent.

Argonaut European Income fund manager Oliver Russ says the Bank of England must ‘wake up’ and cut rates by 0.5 per cent in December and a further 0.25 per cent in January in order to de-stress the financial system and housing market.

“The Bank of England is behaving like the British Governor in Carry On Up The Khyber, who when asked for his response to a crisis replies ‘We’re British – we won’t do anything," he says.

“UK rates are very high by international standards, and the BoE needs to wake up and start cutting. In my view, UK rates need to come down by 1 per cent as soon as possible. This would enable the excesses that have built up in the economy to be gradually worked off, rather than undergo a painful and sudden readjustment."

But Alex Brummer commented in the Daily Mail that "Lowering rates before the holiday season would make little difference to shoppers as, is the case every year, they spend what they have and more"

The Bank of England is due to make a decision about the official bank rate tomorrow.

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