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BOE Expected to Cut Interest rates Today
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Posted by: forwardone
The Bank of England is fully expected to cut borrowing costs a quarter-point to 5.25 per cent today, but the prospect of further rate cuts is becoming increasingly uncertain.
In the short term, some analysts believe there is still place a 30 per cent chance that the MPC will take a more aggressive stance and cut rates by half a point today. However most are betting on a quarter-point cut.
There have been calls for the Bank to follow the lead from the US Federal Reserve and cut rates heavily now to prevent further falls in the equity markets that could hurt the wider economy.
The US Federal Reserve reduced rates by 1.25 per cent in the space of nine days during January to reassure panicked markets that it was ready to act boldly to avert the world's largest economy slipping into recession.
While the Federal Reserve's central mandate is to ensure economic growth, UK rate-setters are focused on keeping inflation at 2%, giving them much less room for manoeuvre.
Mervyn King, the Governor of the Bank of England, said recently that the current rate of 5.5 per cent is "bearing down in demand."
While he hinted that interest rates were likely to fall, he also sounded a warning bell that inflation is likely to rise more than one percentage point above the Bank’s 2.0 pct target over the course of the year meaning he would have to write a letter of explanation to the Chancellor of the Exchequer.
The latest reading of inflation showed the annual rate of Consumer Price Index (CPI) inflation stood at 2.1 per cent in December, although the MPC will have had a preview of the figures for January when they make their decision.
The MPC held rates at 5.5% last month, despite calls from retailers for a 0.5% cut to help ease the current squeeze on consumer spending.
While the committee is keen to see a gradual slowdown in the UK's economy, survey data released since their previous meeting has shown manufacturing growth almost grinding to a halt in January.
But despite a better performance from services firms, the larger services sector is facing intense cost pressures, according to the Chartered Institute of Purchasing and Supply.
With a raft of energy firms announcing higher gas and electricity bills since the new year, there are concerns that inflation is likely to rise further above target.
This week Halifax, Britain's largest mortgage lender, predicted at least two quarter point cuts in interest rates this year but Martin Ellis, its chief economist, said that further rate cuts depended on whether the Bank felt it could keep inflation under control.
Timesonline.co.uk