Bank of England pressured for emergency rate cut

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By Edmund Conway
The Telegraph, London
Thursday, October 4, 2007
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/04/cnrate...
The Bank of England has come under increased pressure to perform an emergency interest rate cut at its meeting today.
The Bank's Monetary Policy Committee is due at noon to make its first decision on borrowing costs since the Northern Rock crisis started last month.
But while it is widely expected to leave rates on hold at 5.75 percent, experts said there remains a significant possibility that it opts for an cut to keep the economy from stumbling.
The British Retail Consortium said the MPC needed to take immediate action. "It is clear the time has now come for the MPC to reassess its priorities," said its director general Kevin Hawkins.
"For the second month in a row Consumer Price Inflation is below the Bank of England's target of 2 percent and we are likely to see that continue in the foreseeable future, as the full impact of previous rate increases works its way through the system and retailers continue to keep the lid on high street inflation.
"Consumer confidence has eased as a result of the squeeze on disposable incomes from rising utility costs and slow earnings growth. A rate cut would give them and retailers much needed breathing space."
The Bank indicated in its quarterly Inflation Report in August that rates might have to rise to 6 percent to keep inflation on track, but since then the CPI has dropped and the economy has been beset by profound threats, not least the credit crunch, in which borrowing has become far more expensive in wholesale markets.
John Postlethwaite at actuary Punter Southall said he would also call on the Bank to cut rates, adding: "Mortgage lenders have had to increase their tracker rates because of the increased cost of borrowing to them and figures suggest that the mortgage and housing market are slowing down.
"Amid so much bad press over the Northern Rock funding issue and the emergency funds for banks that the Bank of England priced out of the market, this could be an opportunity for a face-saving positive move."
The pleas echo a warning from the Ernst & Young Item Club over the weekend that a cut would be the smartest move for the economy and the struggling financial services sector.
They also coincided with news that personal loan rates have shot up dramatically in the past week, according to Moneyfacts.
Experts said the increase in both mortgage and loan rates meant the Bank did not have to raise its base rate so high since, in effect, the market was doing its job for it.
However, Investec economist Philip Shaw said a cut looked unlikely. "We judge that the committee will want a clearer picture of how events are likely to unfold before committing itself to changing rates," he said.

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