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How much will they cut?

5th November 2008 | back to article listings BACK    print this article PRINT

Tomorrow could be a somewhat strange occasion for the Bank of England's monetary policy committee (MPC), with the predictions of economists not being about whether it will announce a rate reduction, but by how much.

Some may wryly observe this at least makes the decision more predictable than last time, when it did not even occur on the scheduled date, owing to the concerted decision by central banks around the world to slash half a per cent off their rates in a simultaneous action.

However, the circumstances surrounding that dramatic move have not entirely gone away. The concerted action by governments to safeguard their banking systems may have helped to ensure the whole system does not collapse and leave the world facing a repeat of the post-1929 Great Depression, but the news soon after that the UK economy has seen a 0.5 per cent contraction in the last quarter will have only added to pressure to take more radical steps.

In such circumstances, those looking at investing in property may be hoping for major cuts in the cost of borrowing, although recent experience shows that the banking sector has been somewhat sporadic at best when it has come to passing these on. Those looking for lower rates may need to shop around rather than assuming that there will be lower rates across the board. That is likely to depend on interbank lending rates.

However, a major rate cut could at least make some progress in this direction. The regular pre-decision Reuters poll of economists found that all 62 questioned said there would be a 0.5 per cent cut - at least. Several tipped a 0.75 per cent cut, while some even went as far as one per cent. One of these, Alan Clarke at BNP Paribas, told the news provider: "We believe that rather than considering whether a rate cut bigger than 50 basis points will imply panic, the MPC needs to judge where the appropriate level of bank rate is."

Of course, there are those who would go further still. The Federation of Master Builders, for instance, has called for a two per cent cut to just 2.5 per cent to boost construction, with director general Richard Diment commenting: "Dramatic economic conditions require dramatic, bold steps."

Nobody is tipping rates to go that low, at least not this month. Built looking historically, it is notable that a one per cent cut would represent the lowest the MPC has ever trimmed the base rate to, matching the level between February and July 2003. At the same time, the MPC has never yet slashed the base rate by more than 0.5 per cent. Either way, for those keen to see the base rate come down there should be something to cheer tomorrow. Just how much remains the question.

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