Call for early cut after MPC freezes rate

May 9 2008 by Iain Laing, The Journal

BUSINESSES called for a cut in interest rates as soon as possible after the Bank of England froze rates at 5%. Members of the Bank’s Monetary Policy Committee (MPC) had been under pressure to make a fourth cut in six months following a flurry of poor economic news.

City economists said they expected the next cut to be made in June, with policymakers reluctant to do so today because of fears that oil and food prices will force inflation above 3%.

The Bank faces a delicate balancing act between controlling inflation and maintaining economic growth. Data earlier this week revealed that activity in the services sector slowed to its lowest level since March 2003 as firms such as banks, hotels and restaurants felt the force of rising costs and a downturn in new orders.

There was also a shock fall in manufacturing output in March, with a 0.5% decline surprising analysts who had forecast manufacturing production to remain unchanged during the month.

Manufacturers’ organisation EEF reluctantly accepted the decision but believes that interest rates will almost certainly need to be cut again in June.

EEF regional director Alan Hall said: “The economy has been through a series of shocks since the credit crisis hit last summer and the Bank has been right so far in responding with a measured approach on rates. However, despite concerns on inflation, further cuts to interest rates are needed to prevent the economy from drifting towards recession.”

Richard Bottomley, president of the North East Chamber of Commerce, said: “The Bank has had to handle conflicting issues – cut rates to maintain strength in the economy, or freeze them to keep a handle on inflation. It has clearly decided that, at this point, keeping a lid on inflation is the key priority. However, it seems inevitable that a cut will be made in the very near future.

“Perhaps the greatest pressure on businesses looking to grow at present is the availability of finance which has either dried up or is only available at high interest rates. The Bank has made efforts with its recent £50bn injection of liquidity to encourage lenders to free up finance but this is taking its time to trickle through.”

Further pressure was piled on the MPC after the property market showed further signs of a downturn and soaring oil prices are increasingly hitting business.

One of the MPC’s nine members, David Blanchflower, made his feelings known last week after saying aggressive action was needed to prevent the UK economy falling into recession.