Bank of England Under Pressure To Deliver

The Bank of England was under intense pressure last night to cut interest rates by a full percentage point, the largest points decrease in 15 years.

Many economists have said that a widely expected 0.5% cut in interest rates won’t be enough to stop a deep and long recession….dubbed a bath tub shaped recession. Interest rates had been held steady until recently as the fear of inflation took precedence over the possibility of recession. Now, with inflation abating, the tools to fight recession are being wheeled out and look set to be used to their full force.

Policy makers and economists point to continued economic deterioration in many sectors of the economy including the behemoths of the UK economy, financial services and retailing. Output shrank by a larger than expected 0.5% between July and September and looks set to deteriorate further and more rapidly in the coming months.

A full 1% cut would be the largest since 1993 after black Wednesday when the UK was struggling to deal with the effects of the last recession.

CBI deputy director-general John Cridland said: “We have talked to businesses of all shapes and sizes across the UK, and the need for a further rate cut is clear.

With commodity prices falling across the world, food inflation has at last peaked out at 9.1% and is now a more manageable 7.5%. Oil prices have plummeted from their nosebleed highs during 2008. The outlook for inflation is more benign going forward, though still high today.

This gives the bank of England the necessary room to slash rates to stimulate the economy…but will it actually make any difference for many people? It won’t help to unfreeze the lending boycott by banks as they seek to shore up their own balance sheets. However, and thankfully, it will give some much needed breathing space for homeowners with mortgages as they head into Christmas as some banks pass on the rate decrease. That in turn could provide some temporary respite for retailers…so the chances of a happy Christmas on the high street haven’t totally vanished.

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Tags: Bank of England, inflation UK, Interest Rates, UK interest rates