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Pressure on for big rate cut as slump gets worse
Hugo Duncan5 Nov 2008
The Bank of England was today urged to slash interest rates as the UK economy sank deeper into recession.
Gloomy figures showed activity in the services and manufacturing sectors slumped again as the financial crisis spread to the real economy.
It piled further pressure on the Bank's monetary policy committee under Governor Mervyn King to cut rates aggressively when its two-day meeting ends tomorrow. The Bank is widely expected to cut rates from 4.5% to 4% but hopes are rising that it may go even further and reduce them to 3.5%.
George Buckley of Deutsche Bank said the MPC needed to "step up a gear" and make the first full percentage point cut in rates since 1993.
Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said: "There is little doubt in anyone's mind about whether or not interest rates will be cut. The real question is just how much will rates be slashed by.
"The MPC must cut from 4.5% to 3.5%. Anything less than that would be a case of too little, too late. The weakness in the economy is disturbing. Things will get worse before they can get better."
Research by Barclays Stockbrokers found 58% of investors back a rate cut to 3.5%. "A fall of half a percentage point won't be enough for most people," said Barbara-Ann King of Barclays Stockbrokers.
Activity in the services sector, which accounts for almost three-quarters of output, fell for a sixth month in a row in October to its worst since records began in 1997. The Chartered Institute of Purchasing and Supply said its barometer of activity in the sector - which includes City stockbrokers, hotels and restaurants - fell from 46 in September to 42.4 last month. A score of 50 is the cut-off between growth and decline.
Roy Ayliffe, director of professional practice at CIPS, said: "October saw little comfort for the UK services sector with activity declining at a record rate. It's increasingly clear firms are battening down the hatches and preparing for a long and hard hitting recession."
Meanwhile, the Office for National Statistics said manufacturing output fell for a seventh month in September, down 0.8%. It is the longest run of monthly declines since 1980.
Howard Archer of Global Insight said: "The latest dreadful data heighten concerns about the potential length and depth of UK recession and heighten the already very strong case for the Bank to cut interest rates aggressively on Thursday. We believe that the door is wide open for the Bank to get on with the job and deliver a full percentage point cut from 4.5% to 3.5%."
Reader views (6)
If interest rates fall to below the real rate of inflation people will understandably become even keener to borrow than they have been for the last twenty years, but who will want to lend? Also, the pound will fall even further.
Funny how none of the experts quoted above foresaw this situation before it struck: makes you wonder just what the nature of their expertise is.
If Paul Volker has anything to do with Obama's financial policy, he will purge the bad debt out of the system with a rate rise, and get the pain over quickly.
- Mdj, Leyton, e10 london, 06/11/2008 00:17
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a rate cut is always welcomed but in reality the banks won't pass it on even the nationalised banks so the government should do what it always does and legislate
- Simon, hemel, 05/11/2008 21:27
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Do not expect any rate cut to be passed on in full. Banks and building societies have just been told they will have to pick up the bill for the interest on the money the Bank of England is lending the Financial Services Compensation Scheme to repay savers who lost money in Icelandic banks and for the cost of government underwriting the Bradford & Bingley collapse. This could be as much as £100 million per year for three years for a big building society like Nationwide and even more for the big banks. Someone has to pay and in the end it will be you and me. Thanks Gordon.
- Keith, london, 05/11/2008 21:12
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What’s the point if the banks don’t pass on the rate cut ?
- Matt, London, 05/11/2008 16:28
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While it may give a short term boost to people's thinking, the fact that loans and mortgages do not immediately benefit from the rate cut, a general upswing in economy is unlikely.
At the moment with rather a lot of bad news about job losses and general insecurity of the business environment people are not going to feel positive and go out and spend. The high level of personal debt resulting from excessive borrowings is coming home to roost.
The system needs cleansing before we can have another round of boom. This is a rule of cyclicality.
- Bharat, Pinner, 05/11/2008 16:08
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Don't do it Mervyn - learn from Greenspan's apology to the US Senate Committee. History is telling you clearly not to tread this path and besides why should you always have to ride to the rescue of the risk takers when they come unstuck. The MPC must be 'crackers' if they do drop rates.
- John, Leighton Buzzard, Beds, 05/11/2008 15:36
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