A Base Rate Cut.

by Mark Johnston

                                              A Base Rate Cut.

It appears that current trading suggests a cut will come long before a rise, with January marked as the most likely month for the Bank of England monetary policy committee to act.

Despite the increasingly bleak outlook, Bank of England policymakers have announced no further help this month, and they have instead held rates for the 41st consecutive month, despite mounting evidence that the UK economy could be stuck in a rut of stagnation.

The Bank of England’s monetary policy committee did however suggest that it might look to cut base rate even further if its flagship funding scheme to get banks and building societies to lend fails.

Therefore, no further rate cut below 0.5 per cent is likely in the near future as the Bank of England appears to be robustly behind its quantitative easing programme.

Although, the latest data, has given little hope that households, or firms have actually benefited from the new scheme.

Capital Economics chief UK economist Vicky Redwood says: “The Committee said that it would only be able to judge this once the impact of the funding for lending scheme had become apparent, which could take “several months.” A rate cut therefore does not look imminent. But at the very least, we expect quantative easing to be extended further once the current £50 billion of purchases are completed in November.”

The improbability of a rate cut to 0.25 per cent was emphasised by comments from Montary Policy Committee member Paul Fisher however he added that “If we thought it would add more stimulus we would do it but asset purchase through quantitative easing is a more powerful way of aiding the economy”.

Robert Gardner, chief economist at Nationwide said that Nationwide expected the base rate to remain at 0.5 per cent until 2015, and said that even ignoring the negatives, any cut would make little difference to the lending market. 

Some money markets are now implying rates would be cut from 0.50 per cent to 0.25 per cent in February 2013 and then rise back to 0.5 per cent in August 2015.

 However, Howard Archer, chief European and UK economist at IHS Global Insight, another City forecaster, did say that there are plenty of reasons for the Bank not to cut rates.

A few financial experts feel that a base rate cut would put significant pressure on lenders and their margins and in all probability it will reduce the availability of credit to the wider economy.

There are also concerns from financial institutions that even lower interest rates would hit banks’ profit margins and constrain their ability to lend, there is also concern that the functioning of money markets would become impaired.

The Bank of England has said it recognises there is a risk in lowering the base rate further, which is probably the main thing holding them back from cutting base rate. They therefore feel that a rate cut at this point would be counterproductive.

 



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