New Year rate cut spells relief for UK economy

28 December 2007 / by None
Britain's beleaguered economy may see an easing of pressure after the Bank of England's Monetary Policy Committee (MPC) minutes revealed that a second interest rate cut may come sooner than anticipated.

During the latest MPC meeting, the Committee voted unanimously to reduce the interest rate by 25 basis points to 5.5 per cent, a move which is hoped to ease the effects of the credit crunch and stave of a recession after official surveys showed a consistent decline in consumer spending over the past month while the number of mortgage applications dropped further, and the number of house repossessions rose.

In July, Bank of England Governor, Mervyn King, came under pressure to raise rates in order to stem rising inflation. However, after dropping the interest rate by a quarter-point to 5.5 per cent on December 6, he has now been criticised for cutting rates at a time when the monetary systems need free-flowing cash to ease the strain of increasingly high Libor rates (the rate of interest at which banks lend to each other) which is currently fixed at a record high of 6.72 per cent.

Now the MPC have returned a consensual decision - something that has not been witnessed since 2001 - to cut rates further after the New Year meaning that retailers, financiers and consumers will hopefully see an easing off of pressure on the national money markets.

In the official minutes, the Committee said that, "Signs of slowing growth in the industrial world were already apparent," and suggested that a "substantial loosening in policy might be needed," while there was further debate about the possibility of a rate cut causing further damage to the economy as such a move would " increase the upside risk to inflation."

However, the Committee decided that the worsening financial market turmoil and the consequent tightening of credit conditions, "had increased the downside risks to activity and inflation in the medium term," and the best option would be an immediate cut.

Economists are predicting that the rate cut will be around January 10.

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