Interest rates set for fresh cut

BUSINESS leaders and economists are calling for the Bank of England’s Monetary Policy Committee to make another big cut to interest rates today.

The MPC is due to announce its December interest rate decision at noon today and experts say a cut of  up to 1.5% is needed to help struggling consumers and businesses in the face of the steepening downturn.

The Bank of England cut interest rates by 1.5% to their lowest level since 1954 last month to try and inject more confidence into the ailing UK economy. That followed a 0.5% cut the previous month but the gloomy economic outlook has worsened.

Professional services giant PricewaterhouseCoopers believes the situation is so grave that another 1.5% cut is required.

Updated PwC projections suggest that, even with this further interest rate cut and an estimated net boost of around 0.3% of GDP from the fiscal stimulus announced in the pre-Budget Report last week, the UK economy is set to shrink by around 1.3% in 2009, the worst performance of any G7 economy next year.

David McKeith, North West senior partner said:“This is no time for half measures. The November Inflation Report made clear that interest rates need to fall further to avoid inflation significantly undershooting its 2% target rate in the medium-term.

“We see no reason for the MPC to delay making a further one and a half percentage point cut in base rates in order to mitigate the risks of the recession turning into a full-blown depression.

“Lower interest rates are necessary but not sufficient to avert a downward spiral into deflation. Banks remain focused on preserving capital and liquidity while the government is keen to encourage responsible lending at reasonable levels. It is essential for the economy that where banks are scaling back their lending, they do so in an orderly fashion.”

Rival firm Ernst & Young believes rates will come down by 1% today.

Professor Peter Spencer chief economic advisor to the Ernst & Young ITEM Club, said: “Manufacturing and services surveys this week have confirmed that the recession is gathering momentum and that the economy will almost certainly have contracted by more than the 0.5% seen in Q3. And with price pressures set to fall off a cliff, the dire prospect of deflation is becoming more probable.

“As a result, a further interest rate cut today is certain – the only question is how bold the Bank of England will be.”