King urged to slash interest rates to 2% now and 1% in New Year

01 December 2008 / by Rachel Mason
The Bank of England should cut the base rate down to two per cent this Thursday, according to leading business and retail groups.

Last month, the Monetary Policy Committee (MPC) slashed the base rate from 4.5 per cent to three per cent, and is now being urged to cut the rate even further.

David Kern, chief economist at the British Chamber of Commerce, says the MPC needs to cut the rate to two per cent – a level not seen since 1951 – in order to stop the UK economy from going into an even deeper recession.

"It is critical for the MPC to persevere with aggressive interest rate cuts," warned Mr Kern. "To alleviate the worse consequences of the recession, we urge the MPC to cut rates by a full one per cent on Thursday, to two per cent."

He also warned that even further cuts will be needed in early 2009. "Additional cuts will be needed in the early months of the New Year, probably to one per cent," he said.

Mr Kern says that as the UK mortgage market suffers, despite the fact that interest rates have hit the lowest levels in years, Bank of England governor Mervyn King will have to "consider using unconventional methods," to kick-start the economy, and suggested the US Federal Bank's $800billion package, announced earlier this week, "provides useful lessons for other central banks."

Stephen Robertson, director general of the British Retail Consortium, also wants to see another dramatic rate cut, saying that the VAT cut alone has not been enough to get people spending.

Commenting on Alistair Darling's decision to cut VAT from 17.5 per cent to 15 per cent, he said: "This is a modest but welcome boost for hard-pressed households," but urged the Government to do more; "it must be just one of a range of reviving measures including cuts in income tax and interest rates," he said, urging the MPC to cut rates to two per cent.

The Forum of Private Business backed both the BRC and the BCC, but didn’t stop at two per cent, saying "the bigger the cut, the better, while Howard Archer, chief UK economist at IHS Global Insight said the question is not will the rate be cut, but by how much.

"The Bank of England is poised to reduce interest rates substantially further on Thursday; the burning question is just how big will this cut be." he said.

"A 50-basis-point interest rate cut from three per cent to 2.5 per cent seems the absolute minimum that the Bank of England will deliver on 4 December.

"We believe that there is a very strong chance that the MPC will slash rates by a further 100 basis points and take them down to two per cent.

© Fair Investment Company Ltd