High expectations of interest rate cut
7th April 2008
A recent poll has shown that the majority of economists now expect the interest rate to be cut by the Bank of England this week, as the global credit crunch continues to take its toll in the financial markets. The Monetary Policy Committee is due to meet this coming Thursday for its monthly rate setting meeting, and whilst many industry officials had been predicting that the next rate cut would be in May, the general consensus has now shifted in favour of an interest rate cut in April.
The poll showed that 49 out 63 economists that were questioned thought that the Bank of England would now cut rates next week, with various factors adding to the pressure to cut the base rate sooner rather than later. Economists expect the base rate to be cut by 0.25% on Thursday, which would take the rate down to 5%. The Bank of England has made it clear that setting the base rate is a fine balancing act at the moment due to fears over the economy versus fears over rising inflation.
However, in a recent statement the Bank of England governor, Mervyn King, indicated that the tight credit conditions in place in the UK at present increased the likelihood of an April rate cut. With the credit crunch likely to get worse over the second quarter of the year, and with financial difficulties affecting consumer spending, many think that the central bank has no other choice but to cut rates as quickly as possible. Some have even suggested that the country is on the brink of recession, but the Bank of England has said that it will not be slashing interest rates in the same way as the US Federal Reserve has over the past six months.
Whilst expectations over a rate cut next week remain high, Mervyn King has stated that the MPC faces a very tough decision this coming week, as it needs to balance boosting the economy with keeping a lid on inflation. The rate of inflation is already way above the government's target having hit 2.5% in February, and it is expected to rise to 3% over the coming months.
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