Rates Set To Continue Going Down

The reduction of the base rate by the Bank of England came after a whirlwind week after which it became almost inevitable that the Bank would have to reduce the rate or risk severe damage to the UK economy. Just a few days earlier the popular prediction was for rates to remain unchanged until spring was just around the corner, but the cut same sooner than Christmas in an attempt to re-ignite the stagnating retail and housing markets.

So, where next and how soon for the base rate? Here are some thoughts of the experts.

Howard Archer at City research firm Global Insight said: “We expect the Bank of England to enact two further 25 basis point cuts in interest rates during the first half of 2008, taking them down to 5% by mid-year. This reflects our belief that UK growth will slow markedly over the coming months and will average just 1.9% in 2008. Slowing growth should increasingly dilute underlying inflationary pressures.”

Economic adviser to Deloitte & Touche, Roger Bootle, said: “I previously thought that rates would drop to 5%, but I now think that they could eventually be cut all the way to 4%.” He added: “I doubt that the MPC will hold off from cutting rates again for long. After all, the slowdown in economic activity that is well underway will go some way to containing price pressures. I think there is a good chance that interest rates will be cut again in February. And if the financial market turmoil continues, a move in January would not be out of the question.”

George Buckley at Deutsche Bank said: “Not surprisingly, the statement accompanying the decision highlights the growing downside risks to growth and the role the credit crisis is playing. Near term at least, they will continue to watch CPI [inflation] closely, but slower growth is expected to dampen inflation ahead. We expect rates now to fall to 5% by mid 2008.”

David Brown at Bear Stearns said: “The Bank of England has pulled the rip-cord to much lower rates. We could well be staring into the jaws of UK rates coming down to 4% in this cycle.” He went on: “We expect another cut in January, with rates to target 5% by the second quarter.

UK rates should be at 4.5% by the end of 2008, possibly even lower if the downturn is more severe. This has been a cut to alleviate the credit crunch and provide a rescue remedy for growth. Lower rates should help to put a prop under the UK housing market.