Interest rates likely to be kept on hold in January but expect cut to 475 per cent by third quarter

07 January 2008 / by Rachel Mason
On Thursday, The Bank of England will face one of its biggest decisions since becoming independent more than ten years ago – whether or not to cut interest rates for the second consecutive month.

Last month, the Monetary Policy Committee (MPC) cut rates by 0.25 per cent to 5.5 per cent, following growing concerns about the cost of borrowing. The cost of borrowing is still high, with lending figures last week revealing that mortgage approvals fell to a three year low in November, but inflationary warning signals make it a tough decision.

According to a Reuters' survey, 51 of 63 "leading economists" said they should wait until at least February before making any further cuts, but many leading financial bodies are calling for a further cut this month.

The CBI says the key financial services industry is into its biggest downturn since the recession in the 1990s, a Lloyds TSB study has revealed that confidence in the economy is at its lowest rate in more than five years and the British Chambers if Commerce says pessimistic data about an economic slowdown means the bank should "act now" and cut rates "as soon as possible."

Howard Archer, chief economist at Global Insight says he expects the Bank of England to cut interest rates to 5.25 per cent by February at the latest, but that "it seems touch-and-go as to whether the bank will act as soon as Thursday."

"The MPC's 9-0 vote in favour of December's interest rate cut and the general tone of the minutes of the December MPC meeting indicate that another interest rate cut early in 2008 is very much in the cards," said Mr Archer.

"The MPC has clearly become significantly more concerned about the growth outlook and the dampening impact of the credit crunch, and is prepared to act despite ongoing concerns about near-term inflation risks."

Mr Archer says that the MPC's decision on whether or not to act as soon as next Thursday could still be influenced by the data and survey evidence out over the next few days, particularly the December retails sales monitor from the British Retail Consortium and the latest Halifax house price index.

"If consumer spending was muted and house prices fell markedly further in December, it would significantly bolster the case for the Bank of England to step in with an immediate further interest rate cut," continued Mr Archer, "however, if consumer spending appears to have held up relatively well in December, it would increase scope for the MPC to remain on the sidelines for another month, while it gauges how growth and inflation are developing.

"Regardless of whether the Bank of England trims interest rates from 5.50 per cent to 5.25 per cent next Thursday or waits until February, we expect them to be down to 4.75 per cent by the third quarter," he concluded.

© Fair Investment Company Ltd

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