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Wed, Feb 04, 2009 - Page 10 News List

Bank of England expected to cut rates tomorrow

AFP , LONDON

The Bank of England will slash British interest rates tomorrow to a fresh historic low as it attempts to fight a painful recession, analysts said.

The British central bank cut its key lending rate last month by half a percentage point to 1.5 percent — which was the lowest point since it was established in 1694.

Most analysts predict the bank’s nine-member Monetary Policy Committee (MPC) will cut rates tomorrow by the same amount to a fresh all-time low of 1 percent at the end of a two-day meeting.

That would also mark the fourth monthly rate cut in a row as Britain battles recession amid easing inflationary pressures.

“Once again the Bank of England’s MPC head into their monthly meeting under severe pressure to cut interest rates,” IHS Global Insight economist Howard Archer said in London.

Investec economist Philip Shaw said his house expected “a further 50-basis-point reduction in the bank rate, taking it to a new all-time low of 1.0 percent.”

Since last month’s rate cut, official data showed that Britain sank into a deep recession in the second half of last year as the global financial crisis raged.

Meanwhile, the European Central Bank was expected tomorrow to hold borrowing costs at 2 percent after slashing them at a record pace since October to combat recession in the eurozone.

Britain is mired in recession for the first time since 1991 after GDP shrank by 1.5 percent in the fourth quarter of last year after a contraction of 0.6 percent in the third.

The fourth-quarter figure was also the biggest fall in GDP since 1980.

“With GDP suffering its largest drop for nearly 30 years in the fourth quarter of 2008 ... credit conditions remaining extremely tight and a period of deflation highly possible in the second half of this year, the pressure on the Bank of England to act is intense,” Archer said.

He said the latest economic data reinforced the belief that “the economy is poised to suffer in 2009 the largest single year contraction since the Second World War.”

The Bank of England is, meanwhile, considering increasing money supply to ensure growth does not slow so much that inflation falls below target.

Bank governor Mervyn King said last month that the central bank was considering the “unconventional measures” that the British government placed at its disposal as part of a new package.

The government has said it will allow the bank to purchase private sector assets worth up to £50 billion (US$71 billion), effectively pumping money directly into the system in an effort to kick-start lending in the economy.

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