BoE under pressure to make aggressive interest rate cuts


Mervyn King, the Bank of England’s Governor, is under severe pressure to slash interest rates this week to fight off a recession.

The Monetary Policy Committee (MPC) is to meet on Wednesday with an announcement on Thursday lunchtime, and many economists believe that a quarter point reduction is inevitable. Rates have remained the same since April in a bid to curb runaway inflation.

Global Insight is predicting that the Bank will lower rates by a quarter of a point to 4.75% this week with a ‘real possibility’ of a half-point reduction. It added that the rate will drop to 3.25% in 2009, below the 50-year low of 3.5% in 2003.

The last time the Bank of England cut rates by a half-point was in November 2001.

Howard Archer, Global Insight’s chief UK economist, explains that the further tightening of lending criteria and higher market interest rates will be of major concern to the Bank.

Meanwhile, Michael Saunders, Citigroup’s UK economist, is predicting that rates could go below 3.25%. If financial conditions continue to worsen, rates may have to go even lower, he believes.

David Blanchflower, a member of the MPC has been calling for big cuts in rates and is now pushing for an even bigger reduction to prevent the economy from seizing up. Last month, Mr Blanchflower was only one of the nine-member committee who voted for a cut.

The forecasts of lower interest rates come as Prime Minister Gordon Brown has met with European leaders in Paris. The PM is calling for a new £12 billion fund to help small businesses through the current financial crisis.

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