Bank of England set to cut rates again

The Bank of England is widely expected to cut interest rates by at least another 0.5% this week as it tries to stave off a deep recession in the UK.

The Monetary Policy Committee surprised markets last month by slashing the base rate by 1.5% to a 53-year low of 3%.

But with inflation falling and the UK heading for a recession, economists expect a further cut to be announced on Thursday, with some pencilling in a 1% reduction.

The MPC’s tone has turned markedly dovish in recent weeks, with minutes for October’s meeting showing that the committee considered slashing rates by 2%, but it decided to hold off this measure while it waited to see what fiscal stimulus the Chancellor would unveil in the Pre-Budget Statement.

It also drew back from the bigger cut to give it time to assess how the wider economy would respond, and to prevent too big a surprise severely hitting the pound.

But figures released since the last meeting have show that consumer spending fell at its fastest rate for 13 years during the third quarter, with retailers bracing themselves for a gloomy Christmas.

Manufacturers output expectations are also at their weakest level for nearly 30 years.

At the same time, inflation is now dropping at its fastest rate for 16 years, falling from 5.2% to 4.5% in October, causing the MPC to shift its focus to ensure it does not undershoot its 2% target.

Philip Shaw, of Investec Securities, said: “Hints from November’s MPC minutes suggest the most likely range of possibilities lies between a reduction of 50 basis points and 100 basis points.

“However Monday’s big Pre-Budget Report give-away suggests that the committee may aim for the bottom of this range.

“Additionally it may want some time to evaluate the path of the economy and to keep some of its powder dry to provide good news further ahead. Accordingly we are forecasting a 50 basis point cut in the Bank rate to 2.5%.”

But Howard Archer, chief UK and European economist at IHS Global Insight, is expecting a 1% cut.

He said: “A 50 basis point interest rate cut from 3% to 2.5% seems the absolute minimum that the Bank of England will deliver on 4 December, and we believe that there is a very strong chance that the MPC will slash rates by a further 100 basis points and take them down to 2%.

“Much could yet depend on just how bad the data and survey evidence are over the next few days, although the clear serious weakness of the economy and sharply retreating inflationary pressures provide strong grounds for another large interest rate cut anyway.”

Ross Walker, UK economist at of Royal Bank of Scotland, is expecting a 0.75% cut in December, with the base rate falling to a low of 1.5% by February.