Economic hopes hang on rates cut by end of year – and more in 2009

THE odds on an interest rate cut before the winter shortened yesterday despite the Bank of England's continued battle to keep a lid on inflation.

Borrowing costs were left on hold at 5 per cent for the fifth month running yesterday, but a growing number of economists now expect a cut in November as the economy slides towards a possible recession.

Further evidence of that slowdown emerged just before the central bank decision with figures showing a record fall in house prices and the worst new car sales since 1966.

Yesterday Scottish business leaders renewed their calls for a cut in interest rates before the end of the year.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said the decision to freeze rates had come as "no surprise". But she added: "If as expected we begin to see falling inflation again towards the end of the year, then it is vital that the Bank of England acts in a timely fashion to reduce interest rates further in order to support Scottish businesses.

"There is no doubt that the economic slowdown is beginning to impact on Scottish firms."

With inflation running at more than double the Bank's 2 per cent target, the majority of analysts had expected the monetary policy committee to keep rates unchanged yesterday.

However, money markets are pricing in a good chance of three quarter-point cuts by this time next year, taking interest rates down to 4.25 per cent.

Few people expect a rate cut next month, as inflation has yet to peak, but a reduction in November appears increasingly likely.

Howard Archer, chief UK economist at Global Insight, predicted rates could fall as low as 3.5 per cent in 2009.

"We now lean towards the view that interest rates will be cut to 4.75 per cent before the end of 2008, with a move most likely in November," he said.

"We expect the Bank of England to cut interest rates significantly further to 3.5 per cent in 2009."

Frank Blin, Scotland chairman of audit giant PricewaterhouseCoopers, added: "With fears of recession rising and little sign yet of higher headline inflation feeding through into earnings growth, there is now a reasonable chance of a rate cut before the end of this year.

"This is far from certain, but if the MPC waits too long … it will increase the risk of the downturn being longer and deeper than necessary."

Rate-setters are having to balance inflationary concerns with a raft of gloomy economic data.

Earlier this week, the Organisation for Economic Co-operation and Development warned that the British economy was likely to contract in the third and fourth quarters of this year – a technical recession.

Britain's biggest mortgage lender, HBOS, further darkened the mood yesterday as it reported that homes had lost nearly 13 per cent of their value during the past year.

Meanwhile, the Society of Motor Manufacturers and Traders said there were just 63,225 new car registrations last month – the UK market's weakest August performance since 1966.

The nine-member MPC was split three ways last month. Tim Besley wanted to raise rates to keep a lid on inflation while David Blanchflower voted to trim borrowing costs to ease the economic pain. He has since signalled that he might have voted for a half-point cut this month.

Global Insight's Archer said he thought it unlikely that any of Blanchflower's colleagues would have yet joined him in voting for an interest rate cut.

• The European Central Bank left its main interest rate on hold at 4.25 per cent yesterday.