Interest rate cut hopes

It has materialised that an interest rate cut is looking likely after minutes from the Bank of England’s Monetary Policy Committee meeting showed members talked about the option of reducing rates from 5.75% to 5.5% to kick-start the slowing economy following the crisis in the credit markets.

Yesterday the pound was up just 0.08 of a cent at 2.0338 against a weak dollar as traders bet on a rate reduction. Gavin Redknap, a Standard Chartered economist said rate cuts are on the agenda at the Bank of England.

Philip Shaw of Investec predicts a rate cut in November, however, Simon Hayes of Barclays Capital believes there is just a 33% chance.

The Bank of England said if the economy slows, inflation is expected to stay around the 2% target according to its August inflation report. Yesterday’s minutes demonstrate that the Bank is worried that the problems in the credit markets would slow economic growth too much.

Inflation is running at just 1.8% so the Bank has room for manoeuvre.

However, the Bank is worried that a rate reduction this month would look like panic and the full extent of the credit crunch is still uncertain. The Bank added that it is prudent to sit tight as the November Inflation Report is just around the corner.

The bank said that a rate cut this month was not widely expected as a cut could be seen that the committee was focused on supporting the financial system and not on meeting the inflation target.

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