Bank rates expected to fall in attempt to stem credit crisis

07 April 2008 / by Rebecca Sargent
Experts are predicting that the Bank of England’s base interest rate will continue to fall by as much as a full percentage point by the end of this year.

The forecasts come ahead of the Bank of England’s Monetary Policy Committee (MPC) meeting later this week. According to financial experts, the current financial climate and its increasing effects on households will force the MPC to cut the bank rate by a quarter percentage point on Thursday.

Howard Archer, chief economist at financial analysts Global Insight, said: “While current elevated inflation pressures mean that the Bank of England has to tread very carefully, we believe that the Monetary Policy Committee will decide that increased downside risks to the growth outlook warrant further preventative action and will cut interest rates down from 5.25 per cent to 5.00 per cent.”

However, any hopes that the bank rate will drop more than a quarter of a percentage point have been dashed, as Mr. Archer, pointing out the importance of inflation, continued: "Inflation risks also mean that if the MPC do act, the interest rate cut will be no more than 25 base points from 5.25 per cent to 5 per cent, in contrast to the aggressive cutting of interest rates that recently has been carried out by the Federal Reserve in the United States."

Despite the slowing economy, inflation continues to rise above the target rate of 2 per cent. It seems that although manufacturers are struggling to sell, they continue to raise their prices, pushing inflation up and going against general economic trends.

However, experts seem to believe that the economy will slow enough to force inflation down by predicting that the base rate will fall by a whole percentage point by the end of 2008. Mr. Howard concluded: "We believe that the increased downside risks to growth stemming from tighter credit conditions, coupled with signs that the economic downturn could be deepening, will lead the MPC to cut interest rates from 5.25 per cent to 5.00 per cent on Thursday, despite the inflation pressures.

"Further out, we expect the Bank of England to continue to enact gradual but steady interest rates cuts. Specifically, we now forecast interest rates to fall to 4.25 per cent by the end of 2008 and to 4.00 per cent in the first half of 2009, as extended below trend growth increasingly undermines companies’ pricing power and limits wage growth, thereby diluting underlying inflation prices."

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