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Speculation on base rate cut continues

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02/08/2012
There is a small possibility that the Bank of England may cut rates to 0.25% on the back of last week’s weak GDP figures which showed the economy is shrinking faster than feared.
Speculation on base rate cut continues

The Bank is to announce its decision over base rate at midday today, however Capital Economics expects the Bank to cut the base rate from 0.5% in an effort to stimulate growth.

The Office for National Statistics (ONS) revealed the UK economy contracted by 0.7% in the second quarter, far worse than analysts’ expectations of a 0.2% decline.

Capital Economics’ chief UK economist Vicky Redwood said the fall in GDP, coupled with the recent sharp pullback in inflation, is likely to push the Bank of England’s Monetary Policy Committee (MPC) to return to more traditional methods of stimulating growth.

“The MPC could do more QE or cut rates further and we think they will cut rates by a quarter point, or even reduce them to 0.1%,” she said.

While the MPC has been content to leave rates at 0.5% for 40 months, instead using QE to boost the economy, more and more commentators are growing sceptical over its use.

They have warned rather than boost growth sufficiently, the £375bn of QE seen so far has merely created rallies in asset prices which are becoming increasingly short-lived.

Redwood said investors want to see a change in direction in policy from the MPC.

“People have become disillusioned with QE, and maybe they should revert to a more normal form of monetary policy,” she said.

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