Base rate may have been in line for bigger cut
The minutes of the latest Monetary Policy Committee meeting have suggested that the latest base rate cut of 1.5 percent could actually have been even bigger, as there was room for the MPC and the Bank of England to consider a rate cut of more than 2 percent based on inflation projections. The Bank of England announced earlier this month that the base rate was being cut by a massive 1.5 percent, which was the biggest cut since 1981 and took the base rate down to just 3 percent.
The November rate cut came just weeks after the Bank of England announced another 0.5 percent rate cut a day ahead of the October MPC meeting, where the rate movement is normally determined. This has seen the base rate fall by a total of 2 percent in the past two months, and many are convinced that the central bank will apply further aggressive rates cuts in order to stave off a full blown recession, with some even predicting that the base rate could fall to zero.
The Bank of England minutes stated: “The projections in the Inflation Report implied that a very significant reduction in Bank Rate — possibly in excess of 200 basis points — might be required in order to meet the inflation target in the medium term.”
However, reports claim that MPC members did not want to strike any more fear into financial markets, and did not want to risk inflation levels as a result in the fall in sterling that could have stemmed from a larger base rate cut.
One economist from the Bank of America said: “With inflation falling much more than expected in October already to 4.5 percent and amid growing gloom about the global economic outlook, we continue to believe that the MPC will need to effect another deep cut next month. We are looking for a 100 basis point cut to 2 percent already, notwithstanding the MPC’s desire to keep back some of its firepower to support confidence in coming months.”
The Bank of England minutes went on to state: “Some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened,”suggesting that some members of the MPC has decided to hold back on a larger cut so that the base rate could continue to be cut over the coming months. One economist said: “The minutes are, unsurprisingly, hinting at further aggressive moves in monetary policy to come.”
Interest rates are now at the lowest level for over fifty years, and if they do fall to 0 percent, as some have predicted that the will, this would take them to the lowest level on record, since the central bank was formed several hundred years ago. Just a year ago consumers were struggling to cope with the interest rate, which had soared to 5.75 percent, but has now fallen to almost half that level.
Tags: Inflation report, base rates, excess, bank of england, point, larger cut, MPC members, bank of america
