Bank to cut rates by 50 basis points

LONDON Mon Jan 5, 2009 2:22pm GMT

The Bank of England will slash interest rates to a record low when it meets on Thursday as evidence piles up that the economy has slumped into a deep recession, a Reuters poll showed. REUTERS/file

The Bank of England will slash interest rates to a record low when it meets on Thursday as evidence piles up that the economy has slumped into a deep recession, a Reuters poll showed.

Credit: Reuters/file

LONDON (Reuters) - The Bank of England will slash interest rates to a record low when it meets on Thursday as evidence piles up that the economy has slumped into a deep recession, a Reuters poll showed.

The central bank is seen cutting another 50 basis points from base rates to 1.5 percent -- taking them to a level not seen since the Bank of England was created in 1694 -- just a month after it slashed them 100 basis points.

A Reuters poll of 61 economists, taken December 29-January 5, showed the Bank Rate falling to 1.0 percent by March and then again to 0.5 percent by June. That is deeper than the trough of 1.0 percent predicted in a poll published three weeks ago.

"We are still looking for a 50 basis point reduction to 1.5 percent this month. It is possible that the MPC opts for a more aggressive 75 basis point or even 100 basis point move," said Philip Shaw, chief economist at Investec.

Fifty-nine of 61 economists said the bank would cut rates this month, with 41 of them plumping for a 50 basis point cut. Four said the bank would cut 75 basis points and another 14 expect a full percentage point chop or more.

Two forecast no change in rates on Thursday -- a big difference from what financial markets are expecting, almost completely pricing in a 75 basis point cut from the Monetary Policy Committee.

Economists surveyed also said there was now even odds chance that the BoE will follow the U.S. Federal Reserve's move late last year in cutting rates to close to zero. Five forecasters predicted Bank Rate at zero in the next few months.

Many cited the historic plunge in sterling over the past several months -- particularly against the euro in recent weeks to near parity -- as a reason why the MPC might opt for a smaller interest rate cut this time.

DEEP RECESSION

But it is becoming increasingly clear that Britain's recession will be deeper than thought just a few weeks ago. A Reuters poll taken in December predicted the economy would contract by 1.6 percent this year, with growth unlikely until the end of the year.

"While we maintain that the MPC will bring rates down close to zero by Q2, we are not sure exactly how low a floor the BoE will be happy to sanction," said Shaw, opting for rates to bottom out at 0.75 percent.

But the outlook is foggier later this year, with medians showing rates back up to 1.5 percent by mid-2010.

Until recently the BoE had been prevented from cutting rates as inflation was running at more than double its two percent target. But policymakers and analysts are now concerned that inflation will undershoot the target and some are worried about the threat of deflation.

Economists see deflation -- a generalised sustained fall in prices -- as a nightmare scenario where economies slump into malaise as consumers and firms hold back on spending on the view that goods and services will become cheaper the longer they wait.

Figures released by the Halifax on Friday showed British house prices, a bedrock of consumer wealth, fell by a record 16.2 percent year-on-year in December, taking them to their lowest level since August 2004.

A dismal economic outlook could lead the BoE to make a swifter and sharper move than most expect.

"If the MPC thinks it's going to go as low as possible then what's the point in waiting?," said Graeme Leach at the Institute of Directors, forecasting a 100 basis point cut.

(Polling by Bangalore Polling Unit, Nigel Davies and Ikuko Kao in London; Editing by Toby Chopra)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.