Interest rates held, but ‘next move will be down’
Oct 5 2007 by Iain Laing, The Journal
THE Bank of England has resisted calls from business for a cut in interest rates to shore up confidence after the Northern Rock crisis and months of stock market turmoil.
Members of the Bank’s monetary policy committee (MPC) have kept rates on hold, despite pressure to follow the US Federal Reserve with an immediate cut.
Though the Bank’s base rate was left at 5.75% yesterday, economists said there was a strong chance a reduction to 5.5% would follow next month.
The MPC will now have more time to assess the impact of money market turmoil on consumer and economic confidence. Tighter lending conditions have already forced up the cost of some mortgages, while a recent survey indicated the run on Northern Rock had knocked spending intentions among consumers.
And Halifax said house prices had fallen 0.6% last month.
The impact of the credit squeeze on lending and deal activity is significant because of the contribution made by financial services to the economy.
But MPC members will have been wary of trimming rates when high oil and food prices could keep inflation above the Government’s 2% target. The Bank’s inflation report in August said rates would probably need to hit 6%.
The British Retail Consortium led calls for a rate cut, arguing that five rises in a year had taken a toll on consumer confidence. Economic adviser to the British Chambers of Commerce David Kern said: “Given the worsening economic prospects, both UK and global, a cut today would have been justified and would have been very helpful in restoring confidence. But we appreciate that today’s decision was an extremely difficult one for the MPC.
“Following the Northern Rock crisis, the Bank of England must restore its credibility and authority. It must show greater sensitivity to the problems of the wider economy, while at the same time making it clear that it will not yield to outside pressures.”
Other lobby groups endorsed the decision, but said the Bank must act swiftly if conditions deteriorated.
Director of manufacturing organisation EEF Northern Alan Hall said: “Today’s decision to hold rates was the right one. However, the goalposts have now moved and the Bank will need to stand ready to cut rates if the recent tightening in lending conditions starts to have a significant impact on business.”
EEF Northern said data pointed to a stable economy with manufacturers enjoying healthy growth. But there were signs the international outlook might be deteriorating.
CBI chief economic adviser Ian McCafferty said: “An interest rate cut was unlikely this month as there are, as yet, few signs of any serious damage to the real economy from the upheaval in the money markets. What’s not in doubt is that the next move will be down.”
