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New rate cut prospect may be high as MPC votes 9-0

17th December 2008 | back to article listings BACK    print this article PRINT

In the context of a consumer prices index (CPI) inflation rate that has fallen by 1.1 per cent in the space of two months, it may seem ironic that yesterday the Bank of England's governor Mervyn King was obliged to write an open letter to chancellor of the exchequer Alistair Darling to account for the fact that inflation is so high.

Such a situation may be a sign of the times that we are living in, with the sudden reversal in contributory factors such as oil prices and the dramatic events in the financial sector pushing economies deeper into the gloom of recession. As a result, Mr King did not write to explain why the CPI level was still above the three per cent ceiling of its target range so much as to warn about how it may fall below the target in the near future.

The governor's statement that there could be a drop in CPI to as low a level as one per cent was reflected today by the minutes of the monetary policy committee (MPC) meeting. Property investors looking for possible hints that there may be yet more cuts on the way - something that could bring mortgage rates down further - may have found much to bolster this hope.

Perhaps the most significant element present was the unanimity. All nine members voted for the cut, in the same way they did in each of the previous two months. Such a situation would suggest they are all of one mind, with a consensus that the prospects for inflation dropping further and further are consistently increasing.

Indeed, the minutes stated exactly this, commenting that "many survey measures of inflation expectations for 2009 had fallen sharply since the previous MPC meeting".

As well as the way economic trends, oil prices and the ongoing effect of the credit crunch have influenced matters, there is also the likely consequence of measures the government announced in the November pre-Budget report, presenting new factors to be considered. In particular, the MPC stated that it expects the VAT cut from 17.5 per cent to 15 per cent to cause CPI to be one per cent lower than it would otherwise be throughout 2009.

With such influences in mind, it may well be that the MPC will find good reason to cut again soon. Such a measure could lower mortgages yet again and potentially help stir a general improvement in the property market, if not immediately then sooner than might be the case without such action. The first meeting of 2009 may deliver more promising news for investors.

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