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Interest rate cut

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07/12/2007

Following the Bank of England’s decision to reduce the Base Rate by one quarter point, industry professionals have heralded it as the first of many cuts to interest rates.

Commenting on the decision, Jon Cunliffe, head of interest rate strategy at ABN AMRO, said: “The move is likely to be the first in a series of cuts. The outlook for UK inflation is favourable and given that there are clear downside risks to consumption from the weakness in the housing market and the tighter credit supply, we expect economic growth to fall. It could well be that rates will be cut to around 4.50%.”

Simon Ward, one of six economists to have correctly predicted an interest rate cut this month, agreed this was likely to be the first of a number of Base Rate reductions. He said: “The Monetary Policy Committee set out the case for an easing of policy in the November Inflation Report and was right to act promptly.”

He added: “With inflation indicators still flashing warning signals, the decision was not straightforward but the MPC has sensibly accorded greater weight to accumulating evidence of a slowing economy and the risks posed by malfunctioning money and credit markets. Another cut is likely in January or February and further reductions could follow unless market conditions normalise early in the New Year.”

The Bank of England cut the Base Rate by 0.25% yesterday, bringing it down to 5.5%. The decision was influenced by factors such as slower economic growth, moderating household and business spending, worsening conditions in financial markets and downside risk for inflation.

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