MPC member hints at more aggressive interest rate cuts

The possibility of a more aggressive programme of interest rate cuts was raised yesterday by one of the Bank of England's more "hawkish" advisers.

Speaking at the Institute for Fiscal Studies in London, Timothy Besley stressed the very difficult task facing the Bank's Monetary Policy Committee (MPC) as it balances the decline in growth and confidence in the economy with continuing inflationary pressures from higher energy and food prices.

Mr Besley, a professor at the London School of Economics, said that "with credit conditions tightening, we might expect a significant reduction in consumption growth over the coming months... It seems like a fair judgement that a return to the conditions seen for secured lending in the first half of 2007 is not imminent".

He also stated that the MPC would be "forming a judgement on how conditions in financial markets are affecting the real economy."

Mr Besley is an external MPC member with a record of voting against rate cuts, so such an even-handed series of remarks was taken by many observers as an indicator that the Bank might, notwithstanding its relatively cautious Inflation Report last week, be prepared to countenance reductions in rates even though inflation is predicted to overshoot its target by more than 1 per cent this year – an event which would trigger a letter of explanation from the Governor of the Bank to the Chancellor.

Alan Clarke, of BNP Paribas, commented: "It is encouraging, from a rates standpoint, that the focus on downside risks came from someone with such a hawkish voting track record. This potentially shows that it wouldn't take much to push the Bank into cutting more aggressively if the threat from higher inflation were to subside."

Mr Besley was presented research that suggested that the link between consumer spending and tightening credit conditions means that the British shopper is in for a difficult time – specifically that a 20 basis-point widening in the Libor spread, as we have witnessed in the credit crunch, would reduce consumption growth by 0.7 to 1.5 percentage points.

Howard Archer, of Global Insight, added: "The comments indicate that, if credit conditions remain tight, he could favour a further reduction in interest rates."

The minutes of the MPC meeting will be published tomorrow.

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