The Bank of England is widely expected to cut its key lending rate by at least half a percentage point on Thursday as recession looms in Britain amid a global financial crisis, analysts said. Some economists are even forecasting the BoE to follow up last month's emergency half-point reduction to 4.50 percent with a cut of one percent this time around.
Since the central bank's Monetary Policy Committee won independence from the government in 1997, it has never reduced British borrowing costs by more than 50 basis points. "It is a virtual certainty that the MPC will cut rates by at least 50 basis points at the upcoming policy meeting," said Michael Saunders, head of European economics at Citi bank in London. "The only real debate is how much they will ease: 50 basis points, 75bp or 100bp. The outcome is uncertain, but on balance we expect it to cut by 100bp," added Saunders.
The half-point cut on October 8, part of co-ordinated emergency action by central banks world-wide, was Britain's biggest interest-rate reduction for seven years. "The (independent) MPC has never cut by more than 50bp. However, as the MPC acknowledges, the economic and financial crisis is unusually severe," Saunders said ahead of Thursday's meeting.
"Households are retrenching sharply and corporate liquidity is worsening sharply - a precursor to further marked cutbacks in jobs and investment," added the economist. The European Central Bank (ECB) is also set to cut its main lending rate sharply at a meeting on Thursday as inflation is falling fast in the eurozone.
Economists' consensus is for a cut of half a percentage point to 3.25 percent. Late last month, the US Federal Reserve slashed its key lending rate by a half point to match a historic low of 1.0 percent. The cut followed the Fed's emergency half-point cut on October 8 co-ordinated with other central banks, including the BoE and ECB, to help fight a world-wide credit crunch.
In recent days and weeks, the central banks of Australia, China, Hong Kong, India, Japan, Kuwait, Norway and Taiwan have joined the wave of global interest rate cuts. However the Danish central bank raised its key interest rate by 50 basis points to 5.50 percent in late October to support the krone which has taken a beating amid the financial crisis.
"We see nothing standing in the way of the MPC (again) easing rates aggressively" on Thursday, said Investec analyst David Page. "There is little to suggest the UK is moving out of its credit crunch yet. The economy is facing a deep recession," he added.
Page also noted that Britain's 12-month inflation rate was set to tumble from its current 16-year high level of 5.2 percent in the coming months as the cost of oil and other raw materials tumbles, allowing the BoE to embark on a series of rate cuts.
The British economy is meanwhile on the verge of a recession after contracting for the first time since 1992 in the three months to September, according to recent official data. Britain is not officially in recession until it reports two successive quarters of negative economic growth. Its economy shrank by 0.5 percent in the third quarter of 2008.
"The question is not will the Bank of England cut interest rates Thursday, rather how big will the cut be?" asked Howard Archer of IHS Global Insight. "We expect the Bank of England to match the 50 basis point cut it made on 8 October, thereby taking interest rates down from 4.50 percent to 4.00 percent. "However, given the very serious and still growing danger that the economy could suffer extended, deep recession, we believe that there is a compelling case for the Bank of England to... deliver a full one percentage point cut to 3.50 percent," added Archer.
Comments
Comments are closed.