Banking News To Cut Or Not To Cut Interest Rates That Is The Question 2875

To cut or not to cut interest rates? That is the question

05 February 2009 / by Rebecca Sargent
Will they or won’t they? That is the question on industry experts’ minds as the Monetary Policy Committee prepares to announce its interest rate decision at midday today.

Since October last year, the decision has been relatively easy and the Bank of England’s MPC has cut interest rates by 3.5 per cent since. However, as deflation becomes a serious concern, they have a tussle on their hands.

City analysts are widely predicting a rate cut of 0.5 per cent, Barclays stockbrokers is expecting this, as is Howard Archer, chief economist at Global Insight.

Both are also predicting that interest rates will fall close to zero this year, Mr Archer said: “Further out, we expect interest rates to fall to a low of 0.25 – 0.5 per cent in the second quarter of 2009 and then stay there for the rest of the year. It is far from inconceivable that interest rates could come all the way down to zero.”

However, industry experts doubt the merits of cutting interest rates further. The Council of Mortgage Lenders (CML) has said it suspects that another interest rate cut alone will not be enough to reverse the low level of housing transactions that is paralysing the economy.

The CML said: “The pros and cons of continuing rate cuts are debatable, but what is certain is that comprehensive measures to support the economy and improve confidence will be essential in the spring Budget.”

Others are plain against a further rate cut, independent policy adviser Dr Ros Altmann said: “I urge policymakers to think again. Rates are already too low and cutting them again will just make most people worse off.

“Panic cuts are not the answer, they may give easy headlines for politicians desperate to ‘so something’ but they have gone beyond the point of being helpful. There are only a million mortgage holders with tracker mortgages, the rest of mortgage holders will benefit little, if at all and savers will be hurt yet again.”

At the last MPC meeting, eight members voted in favour of a 0.5 per cent cut while David Blanchflower wanted a cut of one per cent, arguing that it is “increasingly probable that there would be a deep and prolonged recession.”

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Written by Editorial Team