British interest rates will probably fall further, the Bank of England signalled on Wednesday, with the economy already sliding into recession and unemployment recording its biggest jump since 1992. One week after the central bank made a shock 1.5 percentage point rate cut, it said the economy would shrink sharply next year as the credit crisis takes its toll.
Jobs are already disappearing. The number of people on unemployment benefit jumped by 36,500 last month, the largest increase since December 1992, data showed on Wednesday. Unemployment, on the government's preferred measure, rose by 140,000 in the three months to September to 1.825 million, its highest level in more than a decade. Economists say it could top 2 million by Christmas.
Cable TV operator Virgin Media said this week it would cut its workforce by 2,200. Directories company Yell has already got rid of 9 percent of its staff and said that more were to follow. Governor Mervyn King said the BoE's Monetary Policy Committee was ready to cut rates again if needed following last week's reduction to 3.0 percent, their lowest in half a century.
Presenting the BoE's quarterly Inflation Report, King faced accusations that he had been "caught with his pants down", as anger grows over the prospect of Britain's first recession since 1992. Economists said another cut in borrowing costs was a done deal. "Our previous expectation that the MPC would cut by 50 basis points in December now looks to us to be a minimum," said Simon Hayes, economist at Barclays Capital.
"Our central view now is that we see a 100 basis points cut in December. We then expect further 50 basis points cuts in January and February, taking Bank Rate down to 1 percent." The pound hit a record low against the euro and two-year gilt yields were also at a record low as investors priced in more easing.
The BoE has cut interest rates by a total of two percentage points in the last five weeks. Yet only a few months ago it was worried about inflation, currently 5.2 percent, pushing up wages. Those fears now look unfounded. Wednesday's labour market data showed annual average earnings rose just 3.3 percent in the three months to September, a five-year low.
With oil prices now falling, inflation is set to tumble. The BoE said it could slip below 1 percent in two years - a level which would require King to explain himself to the government as the BoE is mandated to keep inflation at 2 percent. King admitted there was a risk of falling prices, or deflation, but was otherwise unapologetic.
"The world has changed," he said, citing the extraordinary events of the last two months which have felled some of the largest banks. But his critics said the present downturn had already been in train this year when policymakers appeared more focused on inflation.
House prices have been falling fast for a while, and construction companies and furniture retailers have been suffering as a result, laying off thousands of workers. Millions of households have had their budgets stretched to breaking point by a huge rise in fuel and food prices this year.
Personal bankruptcies and home repossessions have been rising fast. King hoped the latest interest rate medicine, with probably more to follow, will pull the economy out of recession by 2010. The BoE forecasts, he said, don't account for more rate cuts and a likely fiscal boost to the economy when finance minister Alistair Darling presents his mini-budget, probably later this month.
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