Rate cuts 'too late' to save UK economy

Published on Saturday 1 November 2008 13:27

A FURTHER 0.5% cut in interest rates this week will be "too late" to save the UK economy as unemployment is on course to hit levels not seen since the early nineties, a forecast from Deloitte has warned.

Although the Bank of England is expected to slash interest rates by at least 50 basis points from 4.5% on Thursday, Roger Bootle, economic adviser to Deloitte, warns it is now helpless to prevent recession and spiralling unemployment.

He said the Bank and the Government's recent efforts to inject capital back into the beleaguered banking system have failed to stop the spread of the credit crunch to UK households and companies, and it is now a question of damage limitation for policymakers.

"All the policymakers can do is to try to limit the depth and duration of the recession," he said.

His comments come after David Blanchflower, an external member of the Bank's Monetary Policy Committee and an "arch-dove" who has long called for hefty rate cuts, last week criticised his colleagues for not being sufficiently "forward looking" in their decisions over interest rates.

Bootle forecasts 1.5 million jobs will be cut across the UK over the next two years, pushing unemployment to 9% – a figure not seen since the early Nineties. He suggests Bank of England governor Mervyn King will be forced to slash interest rates to at least 2.5% next year, or even to a historic low of less than 2%.

Last month's rate cut came a week ahead of schedule as part of global coordinated action with the US and Europe to prevent the world economy from going into meltdown.

Consensus in the City is pointing to a further 0.5% cut to 4% on Thursday, but there is a growing campaign among the financial community for King and his colleagues to take a bold stance and go down to 3.5%.

"Given the very serious and still growing danger that the economy could suffer extended, deep recession, we believe that there is a compelling case for the Bank of England to 'get on with the job' and deliver a full one percentage point cut from 4.50% to 3.50%," said Howard Archer, chief UK and European economist at Global Insight.

The European Central Bank is also expected to reduce rates from 3.75% to 3.25%.

Until last month, the MPC was reluctant to make sweeping rate reductions due to spiralling inflation, which was pushed to 5.2% in September by soaring oil and food prices before the summer.

Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership, says policymakers will turn a blind eye to inflation over the next year as limiting the extent of the recession takes priority.

"It's not just that inflation is coming down, it's that people have stopped worrying about it," he said. Deloitte forecasts inflation will fall to 1% by autumn next year and suggests the UK could even fall into deflation.

The Institute for Fiscal Studies has warned public sector debt could soar to levels not seen since the Second World War.