MPC plays a waiting game after it reveals it considered deeper cut

Published on Wednesday 19 November 2008 20:49

MEMBERS of the Bank of England's monetary policy committee (MPC) will weigh up the tax and spending plans in next week's Pre-Budget Report before deciding how far and fast to slash interest rates, it emerged yesterday.

The MPC voted unanimously to reduce rates by a dramatic 1.5 percentage points to a 53-year low of 3 per cent two weeks ago, but minutes of the meeting signalled more cuts to come. The minutes, published yesterday, suggested cuts of 2 per cent or more were needed to hit inflation targets, but "it would make sense … to reassess the required scale of monetary easing" after Chancellor Alistair Darling's Pre-Budget Report (PBR), due on Monday.

Interest rates are on the way down as recession fears replace inflation concerns for the MPC. But experts said the pace of the cuts would depend on the extent of the fiscal stimulus provided by Darling in the PBR.

IHS Global Insight economist Howard Archer said: "If the government's planned stimulus is at the top end of the 15 billion to 30bn range being bandied about, then the Bank is unlikely to cut interest rates by more than half a point in December.

"However, a smaller fiscal stimulus could see the bank cut interest rates by up to 1 per cent next month," Archer said.

The scale of the cut caught markets off guard two weeks ago but "although some surprise was inevitable, the committee should be prepared to act decisively", the minutes said.

The problems in the banking sector triggered by the collapse of Lehman Brothers had "reinforced the need for a substantial reduction" in rates, they added. The MPC drew back from an even bigger cut to give it time to assess how the wider economy would respond and prevent too big a surprise severely hitting the pound.

The minutes also suggested a 1.5 point cut would give the MPC a chance to explain its thinking and support confidence with further cuts in the months ahead as the economy deteriorates.

Capital Economics predicts borrowing costs will fall below the all-time low of 2 per cent to 1 per cent or lower next year.

Chief European economist Jonathan Loynes said: "It seems that they refrained from an even bigger cut only to avoid surprising the markets too much and to leave room for further cuts.

"They also wanted to see what would be in next week's Pre-Budget Report, but we doubt any fiscal boost will be anywhere big enough to preclude the need for further deep rate cuts."