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Base Rate predicted to fall on Thursday

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03/12/2007

Fund management company New Star has predicted a narrow 5-4 vote in favour of a quarter-point cut in the Bank of England Base Rate this week.

Simon Ward, economist at New Star, said a rate cut on Thursday 6 December was likely, but that it would not be made to offset a seizure in interbank lending, as rumoured. He explained: “Market participants are discussing reports of a massive contraction in sterling interbank lending activity since the onset of the ‘credit crunch’ in August.”

Figures from the Bank of England show the outstanding value of UK banks’ market loans to other UK banks fell from £640 billion at the end of August to £249 billion in September and £186 billion in October.

“However, the figures have been distorted by two major banking groups – apparently HBOS and Bank of Ireland – consolidating the reporting of their subsidiaries,” Ward added. “Intra-group lending between these subsidiaries was previously included in the Bank’s series for total interbank loans, but is now being netted out. According to the Bank’s statisticians, after adjusting for such ‘changes in the reporting population’ interbank lending has contracted by only £3 billion – not £454 billion – between August and October.

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