No surprise as Bank of England cuts interest rates |
The Bank of England has announced a 0.25% cut (to 5.25%) in interest rates. News of the cut, which will mean roughly £30 a month less on a typical 150K mortgage, will come as no great surprise to the markets, given the stock market convulsions seen on both sides of the Atlantic in recent weeks as fears about a US recession have increased. This was compounded by news earlier this week that the US service sector contracted at its fastest rate in January since the 9/11 attacks.
Since last month's meeting of the Bank of England's interest rate setting committee the US Federal Reserve has cut interest rates by 150 basis points in a move aimed at staving off a possible recession. The US economy, whilst still growing, is in worse shape than the UK's however - hence it's unlikely the Bank of England will be taking drastic remedial action of the type recently carried out by the Fed.
Part of the reason is that the short term inflation outlook here gives the Bank less room for manoeuvre, after the recent increase in food and oil prices. Inflation, currently running at 2.1%, is set to rise over the coming months and could even breach the 3% barrier, at which point the Bank of England Governor, Mervyn King, would be required to write a public letter to the Government explaining why this has occurred.
Also worth noting is the depreciation of Sterling, which has fallen by 10% on a trade weighted basis over the last 8 months. This too, will have a negative impact on domestic prices.
On the other hand the global credit crunch has begun to bite with a major bellwether indicator for the economy, namely mortgage approvals, falling to its lowest in a decade.
The betting is that the upcoming slowdown in the UK will be sharp enough for the Bank to sanction a couple of interest rate cuts this year at least, although some commentators, such as Capital Economics, are forecasting base rate to be as low as 4% by next year.
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Added on 24/03/2008 11:32:12
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