Calls for further interest rate cut

Published on Wednesday 22 October 2008 21:42

BUSINESS leaders last night called for interest rates to be slashed by a further half point to ease the impact of an economic recession as the City forecast that borrowing costs could fall as low as 2 per cent in the new year.

The plea came as it emerged that this month's emergency half-point rate cut to 4.5 per cent had been given unanimous approval by Bank of England rate-setters.

Minutes from the October meeting of the monetary policy committee (MPC) – held at the height of the banking sector turmoil two weeks ago – came just a day after central bank governor Mervyn King acknowledged for the first time the UK was likely to fall into recession.

The British Chambers of Commerce said the MPC minutes and the "alarming messages" conveyed by King highlighted the "big risks facing the UK economy".

Calling for a cut in interest rates to 4 per cent at November's meeting, the organisation said such a move would "help restore business and consumer confidence".

A growing band of economists and analysts expect rates to be chopped by a half point – or more – before Christmas.

The Centre for Economics and Business Research (CEBR), which had called for base rates to be cut by 1 per cent at this month's meeting, said borrowing costs could tumble as low as 2 per cent by the end of 2009.

Economist Ben Read said: "We now expect to see 50 basis points (half point] shaved off base rates before Christmas, with a realistic chance of a whole 100 basis points cut, particularly if the third-quarter GDP figures released this Friday are worse than expected.

"With the real possibility of inflation dramatically undershooting its target next year ... we could easily see base rates as low as 2 per cent by next Christmas."

A similar prediction was made by Vicky Redwood of Capital Economics, who said the MPC would continue to "act aggressively".

"Not only did all members vote for the 0.5 per cent cut, but the discussion was unambiguously dovish," she added.

"The case for leaving rates on hold – or indeed cutting by 0.25 per cent – wasn't even discussed."

The prospect of record low interest rates to help revive the economy sent sterling spiralling to a five-year low against the dollar yesterday.

Having fetched two dollars or more for much of last year, the pound is now worth about $1.62.

Mark O'Sullivan, director of dealing at Currencies Direct, said sterling could drop as low as $1.40 as the economic woes intensify.

"Mervyn King's grim assessment triggered big overnight falls as markets interpreted his comments to mean interest rates would soon fall again," he noted.

"People are already pricing (interest] rates as low as 2.5 per cent by the fourth quarter of 2009 and this could see sterling trading against the dollar at $1.40."

David Kern, economic adviser to the British Chambers of Commerce, added: "The sharp falls in sterling would in normal times limit the scope for rate cuts.

"But the economy's weakness is the main reason for the fall in sterling. Firm action to support growth will very probably strengthen the pound in today's circumstances."

There were also signs of a further modest easing in money markets yesterday as the rate at which banks lend to each other overnight dipped to 4.58 per cent – just above the Bank of England base rate.

Three-month interbank rates edged lower to 6.04 per cent but remain well above base rate as banks remain fearful of lending to each other for longer terms.