UK interest rates set for major cut

Bank of England rate setters are expected to slash the cost of borrowing by up to 1% this week in a dramatic attempt to stave off a deep recession, experts said today.

Economists are predicting a reduction of at least 0.5% to 4%, but many believe the worsening economic outlook could see rates slashed by a full percentage point – the biggest ever reduction since the Bank’s Monetary Policy Committee (MPC) was formed 11 years ago.

The record-breaking decrease would take rates down to 3.5%, which would be the lowest level for five years.

However, the move may not offer struggling British homeowners or business borrowers much relief as lenders are thought to be unlikely to pass on the full cut.

More than half of mortgage lenders failed to pass on the last reduction in the Bank base rate, by 0.5% to 4.5% last month, as they faced stubbornly high interbank lending costs.

And of the 44% of lenders that did announce rate cuts since the Bank’s move, a number of them did not made the full 0.5% decrease.

Key money market rates have begun to come down in recent days as British government and Bank of England efforts to shore-up confidence among banks has seen them become willing to lend to each other.

But the three-month interbank lending rate, used by banks to price mortgages, remained at 5.84% on Friday despite the falls and is expected to prevent many banks from trimming rates for borrowers.

The Bank begins its two-day meeting on Wednesday to discuss the cost of borrowing amid an increasingly gloomy economic picture.

Official figures last month revealed that the UK economy took its first step towards recession, with a far worse-than-expected GDP decline of 0.5% in the third quarter.

If the UK records a decline in GDP this quarter, then it will be in a technical recession, defined as two successive quarters of negative growth.

The shock GDP decline has since been followed by downbeat data from a raft of key sectors, including retail, housing, manufacturing and services, leading many to believe the Bank’s MPC may take drastic action when it next meets.

The US last week trimmed its benchmark borrowing rate by 0.5% to 1% in a round of global rate cuts, with China, Norway and Japan among those also to make the move.

Howard Archer, chief economist at Global Insight, said while the UK’s central bank may opt to cut rates by a half point both this month and next, there was a growing case for a full 1% cut.

“Given the very serious and ever growing danger that the economy will suffer an extended, deep recession, we believed 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 to 3.5%,” he said.