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Sterling on slide as the Bank takes axe to rate
Hugo Duncan, Evening Standard6 Dec 2007
The pound tumbled again today after the Bank of England cut interest rates for the first time in more than two years.
Sterling fell more than half a cent to $2.0203 after the monetary policy committee voted to cut rates from 5.75% to 5.5% amid growing fears over the state of the economy. The FTSE 100 index also jumped in the minutes after the decision to stand 98 points higher at 6591.8 before settling up 32.9 to 6526.7.
Sterling fell and shares rose yesterday as expectations of a rate cut grew in the wake of a sharp slowdown in the housing market and a gloomy snapshot of the key service sector, the engine room of the economy for the past 10 years.
The Bank today warned of a slowdown in the economy next year as a result of the credit crunch and economists predicted a further two rate cuts in the first half. The European Central Bank left Eurozone rates at 4%.
A statement from Threadneedle Street said: "Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.
"Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term."
Trevor Williams, chief economist at Lloyds TSB Corporate Markets, urged the Bank to keep an eye on inflation which is running above the 2% target at 2.1%. He said: "Inflation remains the top priority for the MPC and further rate cuts will only happen if the economy continues to slow and inflationary pressure subsides."
The Bank has raised rates five times since August last year to rein in inflation and keep the booming economy under control.
However, the credit crunch threatens to turn the planned slowdown in the economy into a full-blown slump and piled pressure on the Bank to cut rates.
The rate at which banks lend to each other has soared in recent days as institutions rush to secure cash ahead of the year end. One-month Libor, the London interbank offered rate, eased slightly to 6.7475% before today's decision.
Peter Spencer, chief economic adviser to the Ernst & Young Item Club, warned Britain could plunge into recession if rates remain at such levels in the New Year. He said: "The UK economy went into this crisis with a strong momentum but is now decelerating sharply. If effective interest rates had remained at these artificially high levels for much longer, the MPC would have risked a recession in the economy next year."
The Bank of England's full statement
The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.
Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.
CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.
Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.
The minutes of the meeting will be published at 9.30am on Wednesday 19 December.
