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Cutting time?

3rd October 2008 | back to article listings BACK    print this article PRINT

The dramatic events of the last few weeks may leave some wondering where relief for the property industry may come from. Financiers around the world will be holding their breath and crossing their fingers as the US Congress gets a second chance to pass a $700 billion (£395 billion) rescue package for the banking sector, which could have a major impact. But in the UK attention will also turn to events nearer home.

Earlier this week former cabinet minister and Conservative Party leadership contender John Redwood told a conference fringe meeting that rates should come down immediately, arguing that inflation - though it has risen in recent months - will be "nailed" next year, the BBC reported.

This doveish view echoes that of David Blanchflower, who since the last cut in April has been the only advocate of further reductions. Last month he went further out on a limb by voting for a 0.5 per cent reduction, even though the other eight MPC members all supported a hold. Speaking to the Gloucestershire Echo this week, he said: "We are a committee of nine and we will make a decision on Thursday. But my view is that the interest rate must come down and I will be telling that to the committee."

This time, many believe, the other eight will be more responsive to this view. A poll of 12 economists and spokespersons from financial institutions by Adfero has found that seven of the 12 expect a rate reduction. Among those holding this view was the Nationwide spokesperson, who stated: "We will probably see a move in interest rates this month and there are likely to be further reductions over the next year."

Moreover, those anticipating that the base rate will stay at five per cent often did so with caveats. Paul Dales of Capital Economics said the decision would be "very close". Senior economist at the Centre for Economics and Business Research Ben Read said holding this month would only postpone a cut for one more month, while Richard Dodd, the head of media and campaigns at the British Retail Consortium, forecast a hold but said he hoped this forecast is wrong.

As the last vote was eight to one against a cut, a rate trimming this time may reflect recognition that the economy has taken a dramatic turn in the past month. But by responding that way the MPC may not just be acknowledging that recession is coming and the property market is in difficulties; they may also start to pave the way for its recovery.

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