Hopes of UK interest rate cut grow after Australian move

Published on Tuesday 7 October 2008 10:01

HOPES were growing today that interest rates in the UK are to be slashed after Australia's central bank cut its rates by one per cent.

Economists say that the Bank of England's monetary policy committee, which begins its monthly interest rate meeting tomorrow, may slice 0.5 per cent off the rate in a bid to boost the flagging economy.

A reduction in rates to 4.5 per cent would be a big boost to homeowners, businesses and other borrowers.

It will also buoy investors who have been rocked by a grim British Chambers of Commerce (BCC) report published today that says the UK economy is well on its way to recession.

The BCC said it would continue to favour an interest rate cut from five per cent to 4.5 per cent, and expects interest rates to come down to four per cent by the end of this year and to three per cent in 2009.

It is also calling for the government to slash business taxes.

David Kern, economic adviser to the BCC, said: "The mounting global banking crisis reinforces our view that immediate threats to growth are more critical than dangers of high inflation.

"Without forceful and urgent corrective action there is a serious danger that the recession will deepen and cause huge damage."

The BCC was joined by the Confederation of British Industry (CBI), which also favoured a half-point cut.

CBI deputy governor John Cridland said: "In our recent economic forecast, we believed that the MPC would have scope to cut rates by half a point in November, but in the interests of stabilising confidence for markets, businesses and consumers, the CBI now believes that this move should be brought forward to the October meeting."

Australia's cut to six per cent was the largest by the Reserve Bank of Australia since May 1992. Analysts had expected it to drop the rate by 0.5 per cent.

Australian stocks responded positively to the move with other Asian markets gaining as well.

RBA Governor Glenn Stevens said a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.

"Conditions in international financial markets took a significant turn for the worse in September," Mr Stevens said.

"Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices."

Prime Minister Kevin Rudd said the decision would help maintain the stability of the financial system and see Australia through "tough times ahead."

Saul Eslake, chief economist with ANZ Banking Group Ltd, welcomed the cut as "extraordinary and bold."