BoE to cut rates further

The Straits Times
Dec 3, 2008 | 11:09 AM
BoE to cut rates further

LONDON - THE Bank of England will Thursday slash British borrowing costs for a second month running in an bid to spur economic growth as the country teeters on the brink of recession, analysts said.

Also on Thursday, the eurozone is set for an unprecedented third interest rate cut in less than two months when European Central Bank governors meet in Brussels, they said.

While all expect the Bank of England's (BoE) monetary policy committee (MPC) to reduce rates by a sizeable amount following a two-day meeting starting on Wednesday, the exact outcome is uncertain after last month's record lowering.

'Opinion amongst economists is pretty evenly split between a 50 basis points cut and a 100 basis points cut,' said Capital Economics analyst Vicky Redwood.

'Consistent with that, the markets expect a cut of around 75 basis points. We don't think that the MPC will see any reason to delay and believe that a 100 basis points cut is probably the more likely outcome.'

Last month, the BoE slashed its key lending rate by a record 150 basis points or 1.5 percentage points to 3.0 per cent - the lowest level in more than half a century.

The BoE's move was the biggest since 1981, shocking markets around the world, and it later emerged the bank had even considered slashing interest rates by 200 basis points.

Since last month's decision, official data has confirmed that Britain's economy shrank 0.5 per cent in the three months to September. A second consecutive quarterly contraction would put Britain in recession.

The BoE recently said the country was most probably already in recession.

Last week, the government launched an economic stimulus package of 20 billion pounds (S$45.8 billion) in a bid to spark fresh consumer spending and fight back against the downturn.

'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' on Thursday, said Investec analyst Philip Shaw.

Britain's stimulus package however 'suggests that the committee may aim for the bottom of this range,' said Mr Shaw.

'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 points cut ... to 2.5 per cent,' he added.

Also since the November reduction, the BoE has predicted that Britain risks deflation - a prolonged period of falling prices - in late 2009 should interest rates remain at the current rate of 3.0 per cent.

The British central bank's main task is to keep inflation at the government-set target of 2.0 per cent. -- AFP