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Recession pressure on Bank to slash the rate
Hugo Duncan3 Oct 2008
A half-point cut in interest rates is on the cards as Britain plunges into recession.
The Bank of England is under pressure to slash rates when it meets next week in a desperate bid to save the economy.
City experts forecast a cut from 5 per cent to 4.75 per cent - but say there is also a chance of a more aggressive cut to 4.5 per cent.
Such a move on Thursday would bring financial relief to millions of borrowers especially those on tracker mortgages.
Malcolm Barr, economist at JP Morgan Chase, said: "These are not usual times, and the need to demonstrate a willingness to limit both the ongoing plunge in activity and the fallout from the credit crisis is clear.
"It's a close call, but we anticipate a 0.5 basis points move [to 4.5 per cent] next week with a further 0.25 basis points to follow in December."
Hopes of a cut were fuelled by the collapse of the services sector and dismal trading on the high street. Figures from the Bank of England also showed housing equity withdrawal - borrowing secured on a house - has gone into reverse, meaning there is less money in consumers' pockets for spending.
Households ploughed £2.8 billion of equity into their homes between April and June. It was the first negative withdrawal reading since 1998 and compared with the £5.2 billion taken out in the first quarter of the year and a peak of £13.8 billion in the first quarter last year. It came ahead of a key vote in Washington on the US government's proposed $700billion bail-out of the banking system.
In London, the FTSE 100 index was up 22.57 to 4892.91 with banks on the rise on hopes that the deal will go through. David Blanchflower, the arch-dove on the Bank of England's rate-setting monetary policy committee, said urgent action was needed in response to the economic downturn and prospect of mass job losses.
"We are a committee of nine and we will make a decision on Thursday," he said. "But my view is that the interest rate must come down and I will be telling that to the committee."
Howard Archer, chief European and UK economist at Global Insight, said there "was little doubt that the economy is on its way into recession". He forecast a cut to 4.75 per cent "but would not rule out a 0.5 basis points cut" given the financial crisis crippling the banking system and wider economy.
With inflation so far above the two per cent target and heading towards five per cent, the Bank has been reluctant to cut rates.
Philip Shaw of Investec said: "The world has changed rapidly over the past few weeks and we now expect the MPC to cut the official Bank rate to 4.75 per cent. We do not believe that a delay is a serious option."
The Chartered Institute of Purchasing and Supply said the services sector - which makes up three-quarters of the economy and includes financial, transport and leisure firms - suffered its worst month on record in September.
Its measure of activity fell from 49.2 in August to 46 last month, the lowest reading since the survey began 12 years ago. It was the fifth month running it was below the 50 threshold marking the cut-off between boom and bust.
John Lewis, one of the most highly regarded retailers and a bastion of middle England, said sales were down 8.3 per cent last week with touristheavy Oxford Street the only store not to suffer a decline. Peter Jones, in the "bonus belt" of City workers in Chelsea, was down 12.8 per cent.
It came at the end of a grim week which showed sharp declines in manufacturing and construction as well as a record fall in house prices. The average home in London has lost nearly £30,000 of its value in the last 12 months.
