Bank of England cuts interest rate
February 17, 2008
The Bank of England has announced that interest rates are to be cut to 5.25% following the latest Monetary Policy Committee meeting. The drop of 0.25% had been widely predicted by analysts and economists, although many have stated that the decision would have been a difficult one. Last month the majority of committee members voted to keep rates on hold amidst fears over rising inflation levels, but this month concerns over the slowing economy appear to have taken the front seat, hence the decision to cut rates by 0.25%.
One economist stated: ‘Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation. An economic slowdown could result in higher unemployment and threaten what is already a weak housing market with the possibility of a US-style housing collapse happening in the UK. If the UK was to decline into a recession, leading economists estimate that the Government will have to borrow £100bn per annum. Hence a recession must be avoided at all costs.’
In a statement the Bank of England said that lower spending levels were resulting from tighter credit conditions.
The statement read: ‘Business surveys suggest that further slowing is in prospect. These developments pose downside risks to the outlook for inflation.’
It also stated: ‘The committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target.’
The US Federal Reserve has recently slashed interest rates amidst fears of a recession, but the Bank of England is unlikely to follow suit.
An official from the British Chambers of Commerce said: ‘I would like to see interest rates at 5% . . . What the Fed does carries important lessons for us because people forget that there are a lot of similarities between the problems of US and the problems that confront the UK.’
Tom Smith
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