We're Looking on with Interest as Bank Decides What It Will Do Next; the Bank of England's Monetary Policy Committee Begins Another Crucial Two-Day Meeting to Set Interest Rates Today. Here, Economist Howard Archer Examines Its Options as the Recession Deepens in 2009
Byline: Howard Archer
IT seems a dead certainty that the Bank of England will deliver another hefty interest rate cut tomorrow.
We are forecasting a 75 basis point cut from 2% to 1.25%, but it is very possible that the Monetary Policy Committee could produce a third successive reduction of 100 basis points or more.
With the recession deepening, credit conditions remaining worryingly tight and inflationary pressures retreating sharply, there is intense pressure on the MPC to bring interest rates down sharply further. Significantly, the minutes of the December meeting of the Monetary Policy Committee suggested that another substantial interest rate cut in January is very much on the cards.
Not only did all nine MPC members vote in favour of slashing interest rates by 100 basis points from 3% to 2% at the December meeting, but the minutes revealed that the committee considered that "a cut of at least 100 basis points was needed" and they discussed whether a larger cut was warranted.
The MPC considered that, without a further interest rate reduction, consumer price inflation would be likely to substantially undershoot its 2% target over the medium term given the sharply deteriorating UK economic performance and outlook, growing spare capacity, the ongoing dislocations in the financial markets and the worsening, synchronised downturn in global economies.
The decision not to go for an even bigger cut than the 100 basis points enacted in December was partly due to concern that this could lead to an excessive fall in sterling and could also further undermine confidence in the economy.
It was also considered questionable whether there was much to be gained in cutting interest rates by more than 100 basis points given that they had now been cut from 5% to 2% in eight weeks and this would take time to feed through to boost the economy.
Since the December MPC meeting, the UK downturn has continued to deepen and credit conditions have remained extremely tight. The third-quarter contraction in GDP has been revised to an even deeper 0.6% quarter-on-quarter from the earlier estimate of 0. …