BoE governor hints at early base rate cut

by Gill Montia

Story link: BoE governor hints at early base rate cut

The Governor of the Bank of England, Mervyn King, has hinted at an imminent cut in the base rate, while making it clear that the Bank will not follow the US Federal Reserve in making aggressive cut in interest rates.

When questioned by MPs on the Treasury Select Committee, Mr King described the credit squeeze as having “moved to a new and difficult phase” which entailed the risk of a sharp slowdown in the UK economy.

Analysts are hopeful that the Bank’s Monetary Policy Committee will vote in favour of a cut in the base rate next month.

Howard Archer, of economic forecasting consultancy, Global Insight, says: “We now expect the Bank of England to trim interest rates by a further 25 basis points to 5% in April, rather than in May as we had previously forecast. Further out, we expect interest rates to fall to 4.5% by the end of the year and to 4% in the first-half of 2009.”

However, the governor has warned that inflation remains a major concern, having exceeded the Government’s target of 2% last month, when it was measured at 2.5%.

Addressing the committee, Mr King stated “We are not going to lose control of inflation in this country.”

While referring to the UK financial sector, the governor condemned those whose decision making had fuelled the credit crisis, stating: “There’s a lot of hubris around in thinking expansion of financial services was a good in itself. It’s not, it’s a means to an end.”

Mr King also stated that financial institutions “will have to hold more capital in the longer run”.