Stock market volatility puts pressure on Mervyn King to cut rates

24 January 2008 / by Rachael Stiles
The stock market's tumble yesterday, as a result of the US Federal Reserve cutting rates by the largest margin since 1984, is putting pressure on Bank of England governor Mervyn King to cut rates in the UK too.

The FTSE 100 Index lost 130.8 points yesterday, falling to 5609.3, as a result of the US Fed cutting the interest base rate by three-quarters of a point on Tuesday, pushing experts to urge central bankers to focus on avoiding an American recession with proactive measures rather than concentrating on the risks posed by inflation.

Inflation is reportedly one of the primary reasons holding Mervyn King back from making a cut, because the short-run inflation outlook has "worsened markedly", according to the minutes from the Monetary Policy Committee's January meeting. There is concern within the Bank of England over cutting rates at a time when there is significant risk from inflation.

This lassez faire attitude for which Mr King is known has brought criticism on the Bank for its slow reaction to the emerging credit crunch which started with the Northern Rock fiasco, a casualty of the collapse of the America sub prime mortgage market, the effects of which have rippled throughout the global economy.

The MPC voted to maintain the base rate at 5.5 per cent in January but there are hopes that it will be cut in February. The rate cut in America failed to dispel fears of a recession as both US and European share prices suffered yesterday, and there is concern that the cut is indicative that a recession is not only a threat but is already underway.

Wall Street is now bracing itself for what some financial experts are warning might be a 20 per cent drop in deals activity in 2008, compared to last year's record breaking volume of $1,617 billion.

© Fair Investment Company Ltd