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Friday 06th of February 2009
February 4, 2009

Think tank believes rate cut this week is ‘pointless’


by Kay Murchie
”Think

An influential think tank believes that a cut in interest rates this week would not benefit the economy but said other moves such as the Bank of England purchasing corporate bonds would be better.

The Bank of England’s Monetary Policy Committee begins its two-day rate setting meeting today and has aggressively cut rates since October last year when rates were at 5%.

Last month, the Bank cut rates to 1.5% - the lowest level since the Bank of England was established 315 years ago. A reduction of 0.5% to 1% is widely expected by analysts tomorrow but, according to the National Institute of Economic and Social Research (NIESR), there is little point in reducing interest rates further.

The NIESR is forecasting that Gross Domestic Product (GDP) will shrink by 2.7% this year - the worst performance since the end of World War II.

Meanwhile, the think tank is forecasting that the economy would be hit by a 3.8% decline in consumer spending and 8.8% fall in business investment.

NIESR director, Martin Weale, believes there was little point to the last interest rate cut and suggests that the Bank of England buy corporate bonds.

Mr Weale adds that the Asset Purchase Facility (recently announced) will allow the Bank to purchase £50 billion of private sector assets funded by Treasury Bills is a good start but said the Bank should begin the process of quantitative easing.

While a further interest rate cut will be good news for borrowers, it will be further bad news for savers after research by the Association of British Insurers (ABI) found that Britons are ‘disillusioned’ with saving.

The ABI found that nearly three quarters of UK consumers believe the benefits of saving have fallen over the last year.

The Bank of England will announce its interest rate decision tomorrow at midday.

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