BOE Prepared to Cut Rates
Bank of England Governor Mervyn King said policy makers (Monetary Policy Committee) are prepared to reduce interest rates as low as needed to prevent a recession from fueling deflationary pressures.
On November 6, the UK central bank reduced the bank rate by a bigger-than-expected 1.5 percentage points to 3% in a bid to alleviate the mounting pressures on economy.
The central bank has not cut the rate by more than 50 basis points since 1993. This is the lowest rate since 1955 and the single largest cut since the central bank gained independence in 1997. This is also the largest reduction since 1981, when the then benchmark minimum lending rate was cut to 12% from 14%.
Asked whether he would take rates to zero, King said today policy makers "are prepared to cut bank rate to whatever level is necessary", to make sure inflation hits the central bank's target. The Bank of England's forecasts, published today, said inflation may slow "well below" their 2 percent goal in 2009.
"Today's inflation report is a courageous acknowledgment that they are definitely behind the curve and quick action is definitely needed," said Chiara Corsa, an economist at UniCredit MIB. "Risks of a deflation scenario loom at the horizon."
The Bank of England's forecasts show the U.K. economy will contract through 2009 and inflation will slow below the government's 1 percent minimum unless it cuts rates further.
Slowing growth and falling commodity prices are sparking concerns that inflation could give way to deflationary pressures. U.K. manufacturers' raw material costs and output prices fell at the fastest pace in 22 years in October, the Office for National Statistics said Nov. 10.
The Bank of England tries to hit a central target of 2 percent and is obliged to keep inflation within a range of 1 to 3 percent.
King, fielding criticism that he underestimated the risks facing the economy, said "the world has changed" since the collapse of Lehman Brothers Holdings Inc. in September.
"We have seen the biggest banking crisis since the outbreak for the First World War and arguably even bigger than that," he said. The forecast revisions are the largest the Bank of England has made since gaining rate-setting authority in 1997.
Source :
1. King Says BOE Prepared to Cut Rates as Low as Needed (Update1), By John Fraher and Jennifer Ryan.
2. BoE Chief King Says MPC Ready To Cut Bank Rate Further If Needed 11/12/2008 7:00 AM ET.
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