Interest rate cut considered

Updated 13.31 Wed May 07 2008
Keywords: Monetary Policy Committee, interest rates, Bank of England

Bank of England policymakers have begun their two-day deliberations on interest rates.

Economists predict borrowers hoping for a back-to-back cut in interest rates are likely to be disappointed, with the bank's Monetary Policy Committee (MPC) expected to keep borrowing costs steady at 5 per cent.

"While we suspect that a majority of MPC members will still be reluctant to enact back-to back interest rate cuts at this stage, the odds are stacked in favour of interest rates being down to 4.75 per cent by June" - Howard Archer

Pressure from soaring food and oil prices - which rose above $122 a barrel on Tuesday - mean the MPC may wait until June before trimming borrowing costs for the fourth time since December.

At this week's meeting, members of the committee will be handed the latest projections on economic growth and inflation, ahead of the publication of the Bank's quarterly inflation report on May 14.

The CPI measure of inflation is currently 2.5 per cent, but the pressure on prices may soon push it above 3 per cent - the threshold at which Bank governor Mervyn King must write a letter of explanation to Chancellor Alistair Darling.

Global Insight's chief UK economist Howard Archer said: "It now looks an extremely close call - while we suspect that a majority of MPC members will still be reluctant to enact back-to back interest rate cuts at this stage, the odds are stacked in favour of interest rates being down to 4.75 per cent by June."

House prices recorded their first annual drop for 12 years in April as the credit crunch tightened its grip on mortgage lending.

And wider economic indicators in the past month have also been poor, with GDP slowing to 0.4 per cent in the first quarter of 2008 as service sector activity slows.

Activity in the sector was at a five-year low last month, adding to the pressure for another rate cut from policymakers.

Manufacturers have reported weaker order books in April, with surveys indicating clouds over high street trading despite stronger official retail data.

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