Bank of England's monetary policy committee gathers to decide what to do about intere

[Legal Beagles]

A double-whammy of bad economic news greeted the nine members of the Bank of England's monetary policy committee yesterday as they gathered to decide what to do about interest rates. With the economy showing all the signs of having entered a deep recession since the summer, the options are as follows:
Raise rates by a quarter

Risible though this course of action appears now, it was supported by one MPC member - Tim Besley - as recently as August. The argument in favour is that the Bank's job is to keep inflation to its 2% target but inflation has continued to rise and now stands at 5.2%. The case against is that the economy has clearly fallen off the edge of a cliff and inflation is set to plummet over the coming months.
Chances of this happening: zero
Keep rates at 4.5%

This approach was favoured by the bulk of the MPC until the collapse of Lehman Brothers in mid-September. The argument in favour is that cutting rates while inflation is so far above its target will give the impression that the MPC cares more about growth than inflation, and hence undermine its credibility.
The argument against is that the balance of risks has clearly changed towards the likelihood of recession.
Chances of this happening: zero
Cut rates by 0.25%

The Bank has tended to favour quarter-point moves since 1997, saving half-point moves for exceptional circumstances. The argument in favour is that gradualism has served the Bank well in the past. The argument against is that the Bank would be derided if it responded to the clear crisis in the economy with such a modest cut.
If any set of circumstances could be described as exceptional, this is it.
Chances of this happening: 5% at most
Cut rates by 0.5%

Until a week ago, a half-point cut was what the City expected. The argument in favour is that the Bank cut by 0.5 percentage points last month in the coordinated international response to the banking crisis and that a cut of a similar size is appropriate now given the still high level of inflation and the recent weakness of the pound.
The argument against is that the economy is worsening by the day and a half-point cut would leave the Bank still further behind the curve.
Chances of this happening: 40%
Cut rates by 1%

This would break new ground for the MPC (as would a 0.75% reduction) but is now being widely canvassed in the City and in industry groups. The argument in favour is that only a deep cut can cushion the economy's fall. The argument against is that it would be seen as a panic measure and by undermining consumer and business confidence it would do more harm than good. It would also force the Bank to eat a large helping of humble pie.
Chances of this happening: 50%
(Chances of a 0.75% cut: 5%, because it would smack of indecision)
Cut rates by 2%

Some economists believe that rates are destined to hit a post-war low of below 2% and the sooner they get to that level the better. The argument in favour is that there is no real reason to delay, given what's happening to output and employment. The argument against is that it would leave the Bank with little ammunition and might trigger a collapse in the pound.
Chances of this happening: zero

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How much should the Bank of England cut interest rates?

The MPC looks likely to make the biggest rate cut in its 11-year history today

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New figures show house prices dropping 15% in A YEAR - now will Bank of England deliv


New figures today revealed the scale of the crisis facing Britain's housing market as the Bank of England prepared to deliver a much-needed cut in interest rates.

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[Legal Beagles]

New figures show UK suffers worst house price collapse in 25 years - now will Bank of


New figures today revealed the scale of the crisis facing Britain's housing market as the Bank of England prepared to deliver a much-needed cut in interest rates.

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[Legal Beagles]

Bank of England slashes rates by 1.5% - as new figures show UK suffers worst house p


The Bank of England today slashed interest rates by 1.5% to 3% as new figures revealed the scale of the crisis facing Britain's housing market.

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[Legal Beagles]

Shock as Bank of England slashes rates to 3%


The Bank of England shocked the City today by slashing 1.5 percentage points off interest rates today - the largest cut it has made since it was granted independence in 1997 - as it tries to ward off a deep recession.
The Bank's monetary policy committee cut to 3% from 4.5%, the lowest since the early 1950s as it responded to huge pressure from industry and unions to make a deep cut in borrowing costs.
Today's move adds to the emergency half-point cut it made last month in concert with other central banks around the world in the midst of last month's banking system turmoil.
Pressure had been mounting on the MPC all week from a run of poor figures from the manufacturing, construction and services sectors which showed one of the sharpest overall declines on record, suggesting the economy is weakening at a pace not seen since the recession of the early 1990s.
And earlier today the Halifax reported that house prices slumped 2.2% last month from September, the sharpest drop since May, and one which took the annual rate of change down to -15%, the worst since the series began in 1983 and lower than at any time during the house price crash of the early 1990s.
"Housing market conditions remain challenging in the face of the significant pressures on householders' incomes and the reduction in the availability of mortgage finance since last summer," said Halifax chief economist Martin Ellis.
"But housing affordability is improving significantly. The house price to average earnings ratio has fallen below 5.0 for the first time for four-and-a-half years. We expect a further improvement in the ratio over the coming months."
Its announcement was followed by official data showing new construction orders tumbled by 19% in the three months to September from a year earlier, as orders for new houses more than halved. And the Society of Motor Manufacturers and Traders said new car sales were down a hefty 23% in the year to October, suggesting consumer and fleet spending is falling sharply.
"Sharply deteriorating private car sales is a further clear sign that consumers are now sharply cutting back on their spending," said Howard Archer, economist at IHS Global Insight. "While consumers are increasingly cutting back on their spending out of necessity, but it is also evident that many consumers are also retrenching out of choice, reflecting their heightened concerns about the economy and jobs."
Marks & Spencer on Tuesday reported its profits had slumped by nearly half in the six months to September as shoppers stopped buying expensive food treats and reined back their spending on clothing and homeware.
Gordon Brown yesterday urged banks to pass the rate cuts on to their mortgage holders amid reports that some banks were not planning to do so. Several banks have announced this week that they are raising their tracker margins over base rate for new customers, although existing customers with trackers will benefit from the rate cut while savers will undoubtedly see their savings rates cut. The cut should save £135 on a typical £150,000 mortgage.
Few in the City expect it to stop here - most are expecting rates to be cut to 2% or less in the coming months. Consultancy Capital Economics is pencilling in rates at just 1% by the end of next year.

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Bank of England stuns City by slashing interest rates by 1.5% - the biggest cut in 28


The Bank of England today stunned the City by slashing interest rates by 1.5% to 3% - the biggest rate cut since 1981.

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[Legal Beagles]

Interest rates: 1.5% cut may not reduce mortgage rates


Blimey! A 1.5% cut in interest rates is more than most people had dared to predict before the Bank of England announced its decision this lunchtime. There had been calls for it to be daring - and talk of a 1% reduction was growing - but it isn't overstating it to call this a shock decision.
What will it mean? Well it's great news for borrowers who are on tracker deals. Lenders are obliged to pass on the cut so your monthly repayments are set to plummet. If you can afford to (and your lender allows it) it might be wise to keep repayments at your current level - that way you can pay off your mortgage early or build up a buffer in case you want to take a repayment holiday later, or remortgage to a lender that wants a bigger deposit. If you can't afford this you will see extra money freed up to cope with those rising bills.
However, if you are not already on a tracker, or your mortgage is fixed to your lender's SVR, then don't hold your breath for some relief. Lloyds TSB has said it will pass on the full amount, but other lenders could be slower. I wrote earlier - when I thought a 1% cut was on the cards - that lenders were unlikely to pass on the full cut. A 1.5% drop makes it even more unlikely.
The fact it has come as a surprise means they may take a while to reveal their plans. But the Building Societies Association has already warned: "Borrowers looking for new fixed-rate deals or homeowners with mortgages linked to money market rates will not necessarily find their mortgage rates decreasing."
The cut could also be terrible news for savers who have already seen interest rates drop below inflation. Some banks and building societies have kept rates high to attract money, but some savers have already seen rates cut by 0.5% since the start of October. If their savings rates drop by another 1.5% they could soon start thinking they may as well not bother.

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Interest rates: What the experts say


Steve Radley, chief economist at EEF

"The Bank has clearly recognised that unchartered territory requires unconventional measures and has torn up its previous script. The baton now passes to government to do its bit with timely and targeted measures in the forthcoming pre-budget statement."
David Kern, British Chambers of Commerce economic adviser

"We support the MPC's decision to cut rates by more than analysts expected. But we believe the MPC should move much more steadily and deliberately and avoid too many lurches towards emergency measures.
"Emergency measures have the undesirable affect of unsettling the markets and undermine confidence. Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens."
Richard Lambert, CBI director-general

"This is a bold and welcome move by the MPC, and achieves what the CBI had been calling for. Business and consumer confidence has been deteriorating sharply in recent months, and recession has replaced inflation as the major threat to the economy over the next year or two.
"This cut of one and a half percentage points should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers."
Jonathan Turpin, chief executive of Moveme.com

"A further, dramatic cut in rates was a necessary next step for the Bank of England today, which would have faced outrage from across the industry if it had failed to take action. However, it is now up to the lenders to ensure that the nation's homeowners feel the real benefit.
"The government's recent rescue plan came with the pre-requisite that lenders would start lending again. However, the government made a fundamental error by failing to specify that they had to pass on any interest rate cuts to borrowers – leaving the borrower's fate at the mercy of the lender.
"It's time lenders stop playing games and pass on the Bank of England's interest rate cuts direct to the consumer."
Peter Rollings of Marsh & Parsons estate agents

"The MPC has mercifully realised the crucial importance of cutting rates. But: it's not going to make any difference to the housing market at all if the banks don't pass this cut onto borrowers.
"That banks have raised or even scrapped their tracker rates this morning is hugely demoralising for buyers and homeowners. The banks are covering their backs – if they bring mortgage rates down after today's cut it will only be back to where they've been in the last two weeks. It's not good enough. The base rate cut on its own will improve sentiment, but that's all – high street lenders must not thwart the authorities' attempts to revive the flagging market."
TUC head of economics Adam Lent

"This is the right call. It shows the Bank now understands that the problem is recession not inflation. This cut was precisely in line with the TUC's call.
"But the real challenge is to ensure that these cuts are passed on to both business and mortgage customers. Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving again. Unless the cost of credit comes down, there will be many avoidable job losses in sound businesses."
Graeme Leach, chief economist at the Institute of Directors


"This is a bold and aggressive move by the MPC and just what the economy needs. The household savings ratio is close to zero and could spike upwards, business investment intentions have fallen off a cliff and the banks are unlikely to pass on the reduction in full. A 150 basis point reduction shows that the MPC think inflation is yesterday's story and deflation is the risk for tomorrow. We think interest rates could touch record lows of 2 per cent or less by this time next year. The sooner we get interest rates down the less is the risk of a long and deep recession."
Howard Archer at IHS Global Insight

"The Bank of England's decision to slash interest rates by 150 basis points from 4.50% to 3.00% was a particularly bold step. We had expected a 100 basis point cut to 3.50%, but we believe the even larger cut to 3.00% is fully justified given that the already very weak economy has clearly suffered a serious relapse recently and is now in grave danger of suffering a prolonged, deep recession. Furthermore, mounting evidence that underlying inflationary pressures are now moderating significantly gave the MPC scope for aggressive action.
"The fact that the Bank of England had never previously moved interest rates by more than 50 basis points in any direction since the MPC was set up in 1997 highlights the very serious situation that the UK economy is in. On top of the very clear evidence that the economic downturn is deepening, credit conditions remain uncomfortably tight.
"We expect the Bank of England to reduce interest rates by a further 50 basis points to 2.50% in December, and would not rule out a larger cut if the economic downturn continues to deepen. Further out, we expect interest rates to come down to 1.50% by mid-2009, and it is very possible that they could fall even further. This reflects our belief that the economy will contract up to, and including, the third quarter of 2009 before stabilizing. We expect GDP to contract by 1.5% overall in 2009."

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[Legal Beagles]

Interest rates: These are historic times


Wow! Who would have thought the Bank would slash 150 basis points off rates all in one go?
These are historic times. For a start, interest rates are now at their lowest since 1954 and the 1.5 percentage point cut that happened today looks to be the biggest since Norman Lamont jacked rates up on Black Wednesday in 1992 and then brought them down again almost as quickly.
Before that you would have to go back to March 1981 when rates were cut by two points, although then rates, of course, were in the Treasury's hands.
This shows that the monetary policy committee has finally woken up to the enormity of the problem facing the economy.
You only had to look at the 15% annual fall in house prices reported by the Halifax this morning - a bigger fall than during the house price slump of the 1990s - to know that something was wrong
But that is not all. New car sales are down 23% from a year, the SMMT said today while new construction orders were down by a fifth. These are big, big falls in an economy which has seen everything rising for the past 15 years.
This economy looks headed for a recession every bit as bad as that of the early 1990s and interest rates at 4.5% were simply way too high - especially as banks were refusing to lend money to people or businesses anyway.
This cut may not encourage banks to cut their rates by the full 1.5 points or to increase the flow of lending to businesses but it will make much existing debt cheaper, relieving the burden on hard-pressed homeowners - particularly those who have recently lost their jobs as unemployment surges - and on businesses who are making their workers redundant.
This also shows, of course, that most members of the monetary policy committee were way behind the curve in worrying too much about inflation.
Remember that as recently as September these guys were discussing whether to put interest rates UP!
But for Professor David Blanchflower, who has voted for rate cuts at every meeting the MPC has held so far this year, you have to wonder if rates would now be down at 3%.
Since the near-collapse of the global banking system since mid-September, those MPC members worried about inflation suddenly realised they were fighting last year's battle.
In the statement accompanying today's decision, the MPC recognised that inflation could now fall well below its 2% target because prices of oil, food and just about everything else are tumbling as the world heads into recession.
It was interesting that the FTSE 100 and pound reacted so positively to the news. Normally you would expect the pound to weaken after an interest rate cut which reduces the attraction of holding sterling assets.
But the markets clearly realised that a rate cut of this magnitude - and there will certainly be more to come - could help pull the country out of recession, although probably not before 2010.
The MPC has not finished cutting rates. And today's announcement shows they have certainly got the bit between their teeth. A bold move and the right one.

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MPs demand interest rate cut is passed on to customers


Banks and building societies were today put on "red alert" that they must pass on the 1.5% interest rate cut to customers – or face possible parliamentary intervention.
In a veiled threat, John McFall, chairman of the Treasury select committee, said financial institutions have been "defying the laws of arithmetic" by not passing on rate cuts and he warned that it was a "very live issue" with MPs.
Responding to today's announcement of the shock 1.5% interest rate cut – which was a whole percentage point lower that had been expected – McFall said: "This is an unprecedented cut in interest rates, which reflects the depth of the problems that the economy is presently experiencing.
"We need a twin track approach with the Bank of England making a dramatic cut in rates and the government in the pre-Budget report providing a fiscal stimulus to charge up the economy and keep it going.
"This dramatic drop in interest rates should send a red alert to the banks and other financial institutions that they must pass on this cut to customers."
Asked if government would take steps to compel banks and building societies to pass on the rate cut, McFall said: "My committee is looking at the banking crisis and this is certainly a very live issue. In the last few weeks, banks and building societies have been defying the laws of arithmetic by not passing on interest rate cuts to customers."
Yvette Cooper, chief secretary to the Treasury, also urged the banks to "do their bit" by passing on the rate cut.
She said: "They are getting help from taxpayers through the support the government is offering them so the responsibility is on them, having had this additional support, to do their bit."
Vince Cable, the Liberal Democrats treasury spokesman, said: "Naturally we welcome this bold move, which now amounts to a 2% cut in rates in under a month. This is exactly what we've been calling for. It is much more radical than had been anticipated in the City and goes a long way to restoring my faith that the Bank of England can react strongly in an emergency.
"The next priority is to ensure that this cut is passed on to borrowers. It is very clear that the conditions attached to the government's recapitalisation of the banks were far too lax."
But he warned: "This may not be the end of the story. Further interest rates cuts may be needed if it becomes clear this recession is turning into a deep slump."
Adam Lent, the head of economics at the TUC, said the move was "the right call" and "shows the Bank now understands that the problem is recession not inflation". But he too urged the banks to pass the cuts on to business and mortgage customers.
"Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail-out from the taxpayer for its proper purpose of getting the economy moving again," Lent said. "Unless the cost of credit comes down, there will be many avoidable job losses in sound businesses."

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Bank of England stuns City by slashing interest rates by 1.5% to 54-year low


The Bank of England today stunned the City by slashing interest rates by 1.5% to 3% - bringing rates to their lowest level since 1955.

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[righty]

Re: How much should the Bank of England cut interest rates?

bout one and a half percent

[Legal Beagles]

Bank of England stuns City by slashing interest rates by 1.5% to 53-year low


The Bank of England today stunned the City by slashing interest rates by 1.5% to 3% - bringing them to their lowest level since 1955.

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[Legal Beagles]

Q&A: Why is the Bank of England cutting interest rates?


Why is the Bank of England cutting interest rates to their lowest level in 54 years when inflation is still at 5.2%, more than double the Bank's government-set target of 2%?
Until recently, that was exactly why the Bank was reluctant to cut rates in spite of growing evidence that the economy was slowing down which would eventually drag inflation lower .
The point is that the monetary policy committee targets inflation about two years ahead since that is roughly how long it takes for interest rate changes to feed through completely into the economy.
What is the inflation threat now?
The MPC has just put the finishing touches to its quarterly inflation report which it will publish next week. That will have factored in all sorts of weak economic data that have come out in the past few weeks on every part of the economy.
The MPC said in an unusually long statement accompanying its rate decision that the risks to inflation had "shifted decisively to the downside" adding there was now a "substantial risk of undershooting the inflation target".
Why are we undershooting the target?
The recession we are now in - which will have a dampening effect on prices everywhere, combined with huge recent falls in oil and food prices - will soon pull inflation down very sharply, possibly to below 2% or even below zero. So forget that inflation is at 5.2% - it is about to plummet. Such an undershooting of the target is considered by the committee to be as bad as an overshoot.
So what is the committee worried about?
The MPC is concerned simply that it does not tumble below zero, risking a descent into the kind of long deflationary period that Japan suffered through the 1990s and which kept its economy in a prolonged slump.
We have witnessed this year and last Bank governor Mervyn King having to write an open letter of explanation to the chancellor, Alistair Darling, about why inflation had missed the target by a full percentage point. The danger now is that some time next year King may have to write a similar letter explaining why inflation has gone below 1%. The challenge recently has been to get inflation back down to 2%. It could soon be trying to get inflation back up to 2%.
What happens now?
The European Central Bank, the Swiss central bank and the Czech central bank all joined in with rate cuts of their own, following the lead of the Australians earlier this week.
Today many City pundits were saying that the MPC were far from finished in their rate-cutting process. Several said rates could easily go as low as 1% in the coming months.

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