Hopes Rise for a Rate Cut
With fears for a recession now overtaking fears for inflation, expectations are rising in the City for a Bank of England base rate cut this week. Inflation is expected to peak soon, but the economy is in dire need of a boost. A rate cut should help variable mortgage rates.
The Monetary Policy of the Bank of England meets again this week to decide on the base interest rate for October.
The popular forecast is now for the rate to be cut by a quarter of a point to 4.75%, yet only last week City experts were expecting no change to the rate. With poor unemployment figures expected on Wednesday, this has added to the pressure for a rate cut. A report on jobs for September from accountant KPMG and the Recruitment and Employment Confederation will demonstrate deterioration in the employment market and a sharp drop in demand for staff with both permanent and temporary positions on the decline.
In recent months the MPC has leaned towards keeping inflation under control, but the balance looks as though it has tipped in favour of boosting the economy. With price of oil having coming down from its peak and with other prices showing signs of stabilising, it is the raft of poor economic indicators which may force the hand of the MPC towards a quarter point cut.
The other good point has been that wage settlements appear not to have been influenced by rising inflation yet. The Engineering Employers’ Federation has changed its position to now call for a rate cut to help boost business confidence, believing that inflation is set to peak and then fall below the Bank’s 2% target over the coming year.
So City analysts are expecting at least a quarter-point cut this week. However, some economists are hoping for a reduction of half a point to show that the Bank is unwilling to let Britain fall into slump.
A cut in the Bank rate could help variable mortgage rates come down, but it is unlikely in the present climate that banks would pass on the whole cut where they don’t have to.
