Interest rate cut could have been more than 2%

19 November 2008 / by Rebecca Sargent
The shocking base rate cut of 1.5 per cent on November 6 could have been more, the minutes from the Monetary Policy Committee's meeting have revealed.

In fact, due to projections in the Bank of England's Inflation Report, the MPC believed that, "a very significant" cut in the Bank interest rate of more than two per cent "might be required in order to meet the inflation target in the medium term."

However, MPC members voted unanimously for a rate cut of 1.5 per cent at their November meeting, reducing the Bank base rate to just three per cent. The move left the UK speechless as it confirmed fears that drastic action is required to rescue the British economy.

According to the minutes, the rate cut may have been more if it had not been for concerns over the 'surprise' it might cause to financial markets and the damage this could do to the strength of the pound.

Nevertheless, cutting the interest rate by just 1.5 per cent in November has, according to the MPC minutes, left room for further rate cuts in the future. The minutes stated:

"Some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened."

Commenting on the minutes, Joshua Raymond, market strategist at City Index, said: "The Bank of England minutes this morning cement the belief that there is certainly further scope for rate cuts sooner rather than later. The minutes also imply a figure of 50 basis points or more to come. This would suggest that rates would come down as low as 2.5% or lower in the medium term.

"With the inflation still the banks' key focus though, we need to look at how much this week's drastic fall in inflation could take effect. The Bank of England will undoubtedly be thinking about the risk of deflation as it attempts to restart the economy, and this could make an impact on the future rate cuts on the medium term."

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