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The pressure to cut grows

7th October 2008 | back to article listings BACK    print this article PRINT

September was a fairly mundane time for the Bank of England's monetary policy committee (MPC). For the third time in five months the outcome was eight members voting to hold the base rate and David Blanchflower wanting a cut, albeit this time by half a point. One month later, things may be anything but mundane. While there is so much bad news around, a rate cut may be on its way soon, something that could be very good news for those looking to invest in property.

Last week's Adfero poll showing seven experts expecting a rate reduction and five a hold may turn out to reflect the nature of the discussion the MPC will have on Wednesday and Thursday, with a close - and split - decision resulting. On the other hand, it may be that the recent turmoil in the financial markets and the economy produce a consensus that now is the time to declare that the risk of inflation being too low thanks to a recession outstrips the perils of it rising too high.

In the last few months, minutes of MPC meetings have talked of finding a balance between these two conflicting risks. According to the Confederation of Business Industry (CBI), the MPC should now recognise that a decisive tilt has taken place.

CBI deputy director general John Cridland said: "In the light of the current turmoil in the markets, the damage to confidence and implications for the real economy, the CBI believes that the Bank of England should cut interest rates by half a point when it meets on Thursday."

While the CBI is advocating radical action, others see it as inevitable. Such an expert is Centre for Economics and Business Research economist Charles Davis, who told the Evening Standard: "It is now a question of how much, not when they cut rates."

A rate cut of 0.5 per cent would be a radical and highly unusual move. The last one - in October 2001 - occurred to counter the economic consequences that followed a different crisis, namely the September 11th attacks.

Whether or not the Bank feels this is - financially at least - a bigger crisis may become clearer on Thursday. But around the world some believe major action is warranted. A template for the move the MPC may make could have been provided by the Reserve Bank of Australia (RBA), which has just cut the cash rate by [from seven per cent to six per cent, this coming a month after a 0.25 per cent reduction that represented the first trimming since 2001.

The reasoning behind the move, explained RBA governor Glenn Stevens, was that inflation, although rising now, is expected to fall rapidly in 2009. While few would predict an MPC cut of one per cent, the same rationale may be applied for a change of policy now. Should that be so, the cut that takes the base rate below five per cent may be imminent and with better times ahead for investors.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4412.html. Alternatively, please see our full press release archive.

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