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MPC mood swing may herald more cuts

19th December 2007 | back to article listings BACK    print this article PRINT

Having voted by seven to two to hold the base rate at 5.75 per cent in November, it was only optimists who thought December would herald the much-awaited first interest rate cut since the credit crunch struck. Those interested in investing in property wondered when the market might reap the benefits of such a decision as the minutes of successive meetings through late summer and autumn consistently outlined the wait-and-see theme of the monetary policy committee's (MPCs) mindset.

As the December meeting approached, concerns about inflation remained but those of an economic downturn increased. Suddenly, analysts were considering the possibility of a cut before Christmas after all.

The decision, however, was expected to be very tight and difficult. Ian Kernoghan, an economist at London Asset Management stated: "On balance, I'm still looking for a cut, but it's a very close call." Among those looking for a cut, Howard Archer, chief UK and European economist at Global Insight, said the decision would be "extremely tight", adding: "We are going for no change, but we wouldn't be surprised if they do. It's right on the margin."

In such circumstances it may not have been surprising if the eventual decision had split the MPC down the middle, perhaps even producing the third five to four vote of the year. Yet with the publication of the minutes a very different picture has emerged.

En masse, the MPC switched from caution to certainty on the question of a rate cut. The unanimous vote reflected a recognition that the threat to the economy as a whole, not just the property market, was too great for doubts about inflation to hold back a cut. This consideration, in fact, was the one thing which prevented the "substantial loosening in policy" (in other words a larger cut) which the MPC discussed.

Reacting to the news, economists are convinced the next reduction is coming soon. Capital Economics economist Vicky Redwood told the BBC that "lingering inflation concerns might still prompt it [the MPC] to hold off from cutting again until February", but David Brown of Bear Stearns said "a back-to-back cut should be on the cards at the January MPC meeting".

Thus the only disagreement appears to be which of the next two months the cut to 5.5 per cent will take place in. Even before the minutes came out a Reuters poll showed 44 out of 49 predicting a 0.25 per cent reduction by March. Those hoping the property market will be boosted by another cut in rates may have more justification for optimism now than they have for a long time.

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