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Further cut in interest rates is on the cards.

Byline: By Aled Blake Western Mail

Another interest rates cut is likely early next year after it emerged yesterday there was a unanimous vote in favour of cutting interest rates to 5.5% earlier this month. The 9-0 vote by the Bank of England's monetary policy committee (MPC) brought the first cut in the cost of borrowing since August 2005.

The committee described the action as pre-emptive and said it would help to reduce the risks stemming from the credit crunch.

The tone of the minutes and display of unity among policymakers fuelled expectations for a further rate cut in the new year.

Most analysts expect a reduction in February, with rates possibly down to 4.75% by the autumn.

Global Insight economist Howard Archer said, "The MPC has clearly become significantly more concerned about the growth outlook and the dampening impact of the credit crunch, and is prepared to act despite ongoing concerns about near-term inflation risks."

The Bank minutes revealed that a "substantial loosening" in interest rate policy may be needed to tackle slowing growth.

While members remain concerned about the impact of such action on inflation, it said five interest rate rises in 18 months and the expected slowdown in domestic demand should help to dampen inflationary pressures.

The minutes said, "This put the committee in a good position to act pre-emptively to reduce the risks stemming from the tightening of credit without losing credibility among wage and price-setters."

December's rate cut seemed unlikely at the start of the month, but odds on a move by the BoE shortened after evidence of crumbling confidence in the house market and retail sector.

The rate at which banks lend to each other - Libor - also soared to 6.73%, effectively causing a tightening in monetary policy and fuelling fears that economic growth will dip below 2% next year.

The Bank said, "The worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term. Signs of slowing growth in the industrial world were already apparent.

"That suggested a substantial loosening in policy might be needed. However, a large reduction in Bank rate now would increase the upside risk to inflation."

Mr Archer added, "The 9-0 vote in favour of December 's interest rate cut and the general tone of the minutes indicate that another interest rate cut early in 2008 is very much on the cards.

"The timing of the next interest rate cut will clearly depend on just how much the economy appears to be slowing over the coming weeks, and what happens in the financial markets.

"Another interest rate cut in January is possible if the data and survey evidence is very weak.

"However, given recent rising inflation expectations, we suspect the MPC may prefer to wait until February to make sure that pay moderation is continuing in the early 2008 wage rounds.

"We expect interest rates to be cut by a further 25 basis points in February to 5.25% and May, to 5%. Furthermore, we expect interest rates to be trimmed further to 4.75% in the second half of 2008."
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Dec 20, 2007
Words:527
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