Bank urged to cut rates
Bank of England policymakers have been urged to cut interest rates this week in a bid to head off the threat of a sharp slowdown in the economy.
The Ernst & Young ITEM Club, which uses the Treasury’s economic model for its forecasts, said a cut from 5.75% would show the Bank of England responding with “appropriate vigour” to the risks posed by current turmoil in money markets.
ITEM warned recently that GDP growth could be reduced by as much as 1% in 2008 and 2009 if a full-blown credit crunch develops. It added that more than one rate cut may be needed to prevent a significant slowdown in growth.
However, the majority of analysts think the Bank of England’s monetary policy committee (MPC) will announce a no-change decision on Thursday.
cut is more likely to happen in November, when the Bank will have more information about the extent that consumer confidence and economic growth have been affected by the recent credit squeeze.
The committee is likely to be wary about trimming interest rates at a time when high oil and food prices could cause inflation to spiral well above the Government’s target of 2%. The Bank’s last economic report in August said rates probably needed to hit 6%, although this now seems to be off the agenda.
Howard Archer, chief UK and European economist at Global Insight, said: “This rapid turnaround in interest rate prospects reflects the very real danger that an extended credit crunch will weigh down on an increasingly fragile looking UK economy and lead to a marked slowdown in growth over the coming months.”
He said the credit crunch was significant because of the contribution made by the financial services sector to the overall economy in recent years. Homeowners are also coming to terms with five interest rate rises in the past year, with the recent market uncertainty also forcing up the cost of some mortgages.
A study last week found that consumer confidence fell sharply after the Northern Rock crisis with spending intentions cut substantially.
Adrian Cooper, economic adviser to the Ernst & Young ITEM Club, said the MPC needed to act promptly to offset the impact of tightening lending conditions on the housing market and consumer demand.