9th January
Interest rates
The possibility of a further cut in base rates at tomorrow’s meeting of the Bank of England’s Monetary Policy Committee has been the subject of considerable speculation among press commentators this week. As Edmund Conway wrote in Monday’s Telegraph, “though the last meeting was a nailbiter, prepare yourself for another tense Thursday, since in my mind this one is an even closer call than December’s”.

 

Conway pointed out that last month’s cut was a unanimous decision, despite the prevailing view among economists that rates would stay on hold, and that although most City experts seem to expect a cut this month, “in reality the odds are far more finely balanced than they were then.” Among the drivers for a cut, he continued, are further worsening of economic data, notably the housing market, consumer confidence and manufacturing and service sector growth. But there are nonetheless, he adds, “plenty of arguments for freezing rates”, notably resurgent inflationary pressures, and an easing of the crisis in interbank markets.

 

Jeremy Warner, in yesterday’s Independent, argued that if the MPC is going to cut rates anyway, sooner or later, “it might as well get on with it and cut them further right now”, but he and Conway are evidently speaking to different economists. Most of them, according to Warner, “think the MPC will wait until February.” He admitted the case against a further immediate cut is easily made, but in view of the double impact of the credit crisis and steeply rising oil prices, urged the Bank, for the time being, to “set aside its concerns about inflation, and provide the necessary stimulus.” His conclusion was that, for all the “perpetual gloomsters out there gleefully looking forward to the economic Armageddon they have for so long predicted…actually most of us just want stable employment prospects and a nice life. The Bank should be doing all it can to underwrite these modest aspirations.”

 

Patrick Hosking, in today’s Times, agrees. Although he expects the MPC to hold rates, he lists nine reasons why the Bank should “be bolder than usual and cut tomorrow”. A number of these reasons involve reversing swiftly deteriorating sentiment, whether among business leaders planning for the year ahead; lenders whose attitude to risk has fundamentally changed; companies and consumers, among whom sentiment is “curdling at breakneck speed”; homeowners feeling the chill of a house price downturn, or the financial services sector, as a core contributor the UK economy. Hosking also notes that economists generally see the “neutral” level for base rates as somewhere around 4.5-5%, and that with rates currently at 5.5%, the Bank is still applying the brake – which “looks perverse when the road ahead is steeply uphill.”