MPC fuels City hopes of new rate cut

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The Independent Online
FURTHER REDUCTIONS in UK interest rates will be needed, according to members of the Monetary Policy Committee (MPC), re-igniting City hopes of another cut in rates next month.

The minutes of November's MPC meeting, released yesterday, reveal that eight of the nine-strong committee voted to reduce rates by 0.5 points to 6.75 per cent.

Willem Buiter, the Dutch academic and one-time advocate of sharp hikes in UK rates, voted for a 0.75 point-cut, saying this would help prevent inflation falling below target in two years' time. A 0.75 point-cut could also bolster fragile consumer and business confidence, he argued.

Other committee members, however, were concerned about the inflationary impact of such a large cut in rates, as well as its effect on sentiment in the nervous financial markets.

According to the minutes: "There could well be a prolonged effect [of a 0.75 point-cut] on perceptions of the committee's assessment of the outlook, with a risk that people, businesses and the markets mistakenly concluded that the committee knew something that it had not disclosed."

Some - but not all - MPC members believed further rate cuts would be needed. The minutes read: "On one view, it was more likely than not that further cuts would at some point be needed, but the lags in the economy meant that it was not optimal to make those cuts now. On another view, the short-run outlook for future policy was more evenly balanced".

The minutes do not specify which MPC members wanted further reductions in rates, although City analysts believe the majority will vote for another cut in the months ahead.

Sterling fell by almost a pfennig against the German mark to close at DM2.79, as traders speculated the next rate cut would come sooner rather than later.

Most in the City still believe rates will now remain unchanged until next year, although analysts said yesterday's news meant that the chances of a December rate cut had increased.

Meanwhile, the latest survey of independent forecasters revealed that most are more gloomy than the Treasury about the UK economic outlook.

Independent forecasters are predicting growth will slow more sharply next year than the Treasury believes, and that the subsequent economic recovery will be weaker. The independents are also more sceptical about the outlook for the fiscal deficit, although most still believe the Government will meet its "golden rule" - only borrow to invest.