0.75% cut in interest rate needed 'in the medium term'

05 June 2008 / by Joy Tibbs
Growth will be lower and the impact of the credit crunch will be worse than anticipated according to the Organisation for Economic Co-operation and Development (OECD). Yesterday, it urged the Bank of England to cut interest rates later in the year in order to prevent further economic decline.

The organisation reduced its forecast for UK growth from two to 1.8 per cent in 2008 and from 2.4 to just 1.4 per cent in 2009. The Treasury targets currently stand at two per cent and 2.5 per cent, respectively. The organisation claims tighter lending conditions and the precarious state of the housing and mortgage market has damaged investment growth and consumer demand.

The OECD claims inflation is still rising, and it expects consumer price inflation to be above 3.5 per cent later this year before returning to around two per cent next year, bringing it in line with the current Government target.

And, although the organisation suggested that the Bank of England's Monetary Policy Committee leave the base rate at five per cent for now because of inflation, it said that: "Some further easing in policy rates is likely to be required further ahead, to avoid a significant undershooting of the target in the medium term as the economy slows." It claims cuts of 0.75 per cent may be needed.

Furthermore, according to the Chartered Institute for Purchasing and Supply (CIPS), has revealed that the economic slowdown has quickened its pace. Its Purchasing Managers' Index for May fell below the 50 mark, which separates expansion from contraction, to 49.8.

"Financial services companies remained the worst performing in terms of activity, reportedly the result of the credit crunch," said Roy Ayliffe, director of professional practice at CIPS.

However, the Council of Mortgage Lenders (CML) is urging homeowners not to lose hope despite turbulence in the financial markets. Director general, Michael Coogan, recognises that the UK is facing "a worsening economic environment" but says it is committed to working with the Government to help protect those in danger of losing their homes and struggling with mortgage payments.

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