Further Bank interest rate cuts possible as inflation risks fall

29 October 2008 / by Rebecca Sargent
A cut in the Bank interest rate will not single-handedly solve the UK's economic problems argued Monetary Policy Committee (MPC) member Tim Besley yesterday.

However, during his speech, 'Some current issues in UK Monetary Policy', previously hawkish Mr Besley recognised that the issue of inflation is not as serious as it has been over the past 18 months and that consumers are struggling, hinting at the possibility of further Bank base rates cuts.

"As you will know, there was a time last summer when I judged the upside of inflationary risks to be sufficient to warrant an increase in Bank Rate to head off persistent inflation. But since then, the sharp fall in commodity prices and the consequently more benign prospects for food and services inflation, as well as the substantial weakening in demand, imply that the upside risks to inflation have diminished significantly."

Commenting on the imbalance that has brought the UK economy to its knees, Mr Besley said: "The first of these imbalances has been the growth of household indebtedness with the concomitant rise in house prices. As this imbalance unwinds, we are now seeing a sharp contraction in credit availability accompanied by a fall in house prices.

"Just how far this has to run remains unclear. However, it is unlikely that terms of access to mortgage credit will move back to where it was in early 2007 for some time, if ever."

The availability of credit has been a key issue in the constriction of the UK economy, especially mortgage lending. However, according to Mr Besley, this could be beneficial to the UK's financial behaviour.

He said: "In the mortgage market, many borrowers, especially those requiring high loan to value ratios, are effectively rationed out of the market. This is unlikely to end until house prices stabilize and first time buyers have accumulated sufficiently large initial deposits to reflect greater caution on the part of lenders. The latter is likely to come mostly from increased saving."

Shadow Chancellor George Osborne wrote in The Telegraph today of the importance of further rate cuts, "it is a statement of fact that, with interest rates still at 4.5 per cent, there is plenty of scope to stimulate demand with lower rates," he said.

Global shares have since soared; the FTSE has seen a rise of more than 4 per cent since it opened this morning as news of a possible rate cut has spread.

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