Further rate cut likely after MPC minutes reveal unanimous vote

Published 20th Nov 2008

The Bank of England sent out a clear message yesterday that interest rates would be cut again next month when it revealed that the monetary policy committee considered reducing borrowing costs by more than the 1.5 percentage points it announced this month.

Minutes of the MPC's November meeting showed that Threadneedle Street believed "a very significant reduction in [the] bank rate - possibly in excess of two percentage points - might be required" to prevent inflation falling below the government's 2% inflation target.

The doveish tone of the MPC minutes, coupled with a warning from the CBI that factories expect to cut output over the next four months at a rate not seen since the early 1980s, left the City convinced that interest rates would be cut by at least 0.5 point from 3% next month. City economists think that the bank rate may even come down to 2% - equalling the lowest it has been in the Bank's 314-year history.

In deciding unanimously for a 1.5 percentage point cut, the Bank said it wanted to see the size of Alistair Darling's tax and spending boost to the economy in next week's pre-budget report before assessing the required scale of further easing of monetary policy. The MPC also said it wanted to see whether October's coordinated efforts to shore up the banking system had increased the flow of credit and was concerned that a bigger reduction in the bank rate would scare the City. "Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive."

Apart from the emergency cut in interest rates on the day after Black Wednesday in September 1992, this month's move was the most aggressive since the early 1980s. The minutes revealed that the MPC was concerned the markets would think it had gone soft on inflation and wanted to leave some of the easing of policy until after it had had the chance to explain its view that the financial turmoil this autumn had markedly changed the outlook for prices.

Some MPC members also thought there was an argument for the Bank reserving some of its fire power so that it would be able in "the months ahead to support confidence as the economy weakened".

David Kern, chief economist at the British Chambers of Commerce, said: "The latest MPC minutes confirm a radical change in attitude. As demand prospects in the economy have deteriorated and inflation is set to plunge well below target, the MPC correctly acknowledge the need for sharp interest rate cuts.

"Businesses are now facing acute pressures in the face of a worsening recession. We urge the MPC to persevere with a forceful line, and cut rates to 2.5% in December," he said.

Source: ' Guardian '

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