Bank of England in the mood for further cuts in interest rates

Published on Wednesday 21 January 2009 20:56

INTEREST rates are expected to continue their journey towards zero after minutes from this month's rate-setting meeting revealed an 8-1 vote in favour of a half-point cut.

The single dissenting voice, arch-dove David Blanchflower, called for a full one-point cut and warned that it was "becoming increasingly probable" that there would be a deep and prolonged recession.

Minutes from the Bank of England meeting on 7-8 January showed the nine members of the monetary policy committee (MPC) discussed the arguments for leaving rates unchanged.

They eventually opted for a half-point reduction, taking borrowing costs down to a record low of 1.5 per cent, amid fears that their failure to act could damage confidence further in financial markets and the wider economy.

Economists now expect rate-setters to knock a further half-point off rates at next month's meeting. Howard Archer, chief UK economist at IHS Global Insight, said: "Further out, we expect interest rates to fall to a low of 0.25-0.5 per cent in the second quarter of 2009 and then stay there for the rest of the year.

"However, it is far from inconceivable that interest rates could come all the way down to zero."

Investec economist Philip Shaw said he still expected a half-point cut next month "but with some risk the MPC could pass" given a "more cautious" tone in yesterday's minutes.

The minutes read: "There was a reasonable case for maintaining bank rate at 2 per cent at least until the next meeting."

However, the MPC concluded: "The markets had priced in a cut of (half a point] and either leaving bank rate unchanged, or implementing a larger-than-expected cut, could damage confidence further in both financial markets and the real economy."

Next month will see the publication of the central bank's latest quarterly inflation report.

CEBR senior economist Richard Snook said: "With the base rate approaching zero, the prospect of Keynesian deflation is looming large and falling prices choke potential for recovery. These 'unconventional' measures would involve the Bank of England purchasing assets from the banks and government and corporate sector – in effect printing money to stimulate demand and inflation in the economy."

Blanchflower, who is also an economics professor at Dartmouth College in New Hampshire, is due to leave the Bank of England in the summer.