More rate cuts expected in December

19 November 2008

The Bank of England is expected to cut interest rates again in December but says much hangs on the government's pre-Budget report, due next week.

The minutes from the central bank’s Monetary Policy Committee's (MPC) November meeting, where rates were cut by 105 basis points to 3%, revealed it has several more potential cuts up its sleeve to be implemented in the months ahead to boost confidence.

The minutes also note that “it would make sense” to wait until chancellor Alistair Darling delivers his pre-Budget report (due on Monday 24 November) before reassessing the level of interest rate cuts needed to boost the economy without risking another period of rising inflation. This is because its projections for how lower interest rates affect inflation are based on the government’s most recently published tax and spending plans.

However, with the government recently announcing it intends to bring forward some planed spending commitments, the MPC will wait and see what impact any changes have on the outlook for inflation.

The minutes also show the Committee considered cutting the base rate by more than 2% in November to help tackle the “acute” financial crisis gripping the world’s economies. The possibility of introducing such a large reduction in rates was discussed by members of the MPC as necessary to help bring inflation (which at the time was 5.2%) back to its 2% target.

Although the MPC eventually decided a cut in excess of 2% would be too much of a shock to financial markets, with the potential to have a negative impact on sterling, there is still a strong case for rate cuts ahead.

Jonathan Loynes, chief European economist at Capital Economics, says the minutes suggest the MPC is likely to cut interest rates much further over the coming months.

He adds: “Not only did all members vote in favour of the extraordinary 1.5% cut in rates, but 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 the pre-Budget report.”

However, Loynes says he doubts that any fiscal boost unveiled by Darling on the 24 November will be significant enough to preclude the need for further deep rate cuts.

“We see nothing to stand in the way of another big rate cut of perhaps 1% at December’s meeting and still see rates getting to 1% or below next year,” he predicts.

Benjamin Williamson, economist at Centre for Economics Business Research, says: "Eyes now turn towards fiscal policy-makers to see whether or not they can match the MPC’s bold decision, with bold increases in government spending and tax cuts."

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