City predicts further 1% cut in base rate

Economists say Monetary Policy Committee will act to get banks to lend to businesses and each other
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Interest rates will be cut again this week by up to 1 per cent when the Bank of England's Monetary Policy Committee has its monthly meeting.

Economists predict that Mervyn King, the Governor of the Bank, and his MPC team will sanction a cut of at least a half a percent to 2.5 per cent on Thursday. Mr King hinted at last week's cross-party Treasury Select Committee that further reductions in interest rates would be necessary to ensure that the banks pass on the recent falls in full. "We may need to cut the rate more than we would otherwise have done," he said.

More than 60 economists polled last week in a survey forecast that rates would come down by a full 1 per cent, with one predicting they could fall by as much as 2.5 per cent. Base rates were cut in October by 1.5 per cent in a dramatic attempt to loosen monetary policy and persuade banks to start lending again. But lending remains stubbornly tight, as banks are still nervous about trading with each other as well as the corporate sector.

Chris Watling at the Longview Economics consultancy reckons that base rates could be reduced by up to 1 per cent. "Last time they wanted to cut by 2 per cent but the authorities were frightened that such a big decrease would scare the markets, particularly sterling." Mr Watling added that the effects of last week's pre-Budget report would worsen the economic outlook in the UK.

"The idea that you can borrow more to get us out of this situation is ridiculous. We are burdening the country with even more debt and putting our creditworthiness as a country at risk. It is also ridiculous for the policymakers to want to force the banks to lend. It's borrowing which got us into trouble and the last thing we want is for people to borrow more.

"Recession is horrible to go through but it is also cleansing. We have to let it run its course."

Further cuts are expected across the Continent as well this week as the European Central Bank also meets to consider interest rates. It is forecast to make a cut of between a half and three-quarters of a per cent, the same as it did in October and this month.

Until now, the ECB has not been as aggressive as other regions in reducing base rates. However, a new European Commission survey of 15 continental countries reported last week that economic confidence in November had fallen to its lowest point in 15 years. Economists now expect the ECB to make much bigger cuts, but not to go as far as the Swiss central bank, which recently cut its interest rates by 1 per cent.