Page last updated at 06:49 GMT, Thursday, 6 November 2008

Hefty cut in UK rates predicted

UK rate graph

The Bank of England's interest rate-setters are expected to make a big cut in the cost of borrowing when they announce their decision at midday.

Last month they cut rates from 5% to 4.5% and they are now expected to cut by at least another half a point.

But many groups are calling for an even bigger cut of a whole percentage point as the country begins to face up to the prospect of a deep recession.

The Bank has not cut rates by more than half a percentage point since 1993.

On 26 January 1993, long before the Bank of England was given its independence to set interest rates and with the country in a deep recession, interest rates were cut from 6.88% to 5.88%.

'Too little too late'

The thorny issue for policymakers is whether a severe downturn will grip the British economy
Hugh Pym, Economic editor, BBC News

"The recession into 2009 will be both longer and deeper than expected, and we need the strong medicine of a full percentage point cut," said John Cridland, deputy director general of the CBI.

Ernst & Young's influential Item Club agreed with the employers' organisation's conclusion that a whole percentage point cut was needed.

"Anything less than that would be a case of 'too little, too late'," said its senior economic advisor Hetal Mehta.

Weak data

The case for a full percentage point rate cut was strengthened by Wednesday's UK economic data.

Julia Martin, who's in negative equity, says the banks must pass any interest rate cut on to customers

Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row and was at its lowest level since the poll began in 1996, according to an index compiled by the Chartered Institute of Purchase and Supply.

Also, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.

Manufacturing output fell by 0.8% in September, much worse than analysts' expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.

"[Wednesday's] UK data intensifies the case for aggressive interest rate cuts from the Bank of England," said James Knightley at ING.

Raising rates

There are concerns that even if there is a drastic cut in the Bank of England's base rate, it will not be passed on to borrowers.

Cut them! We need to get people spending cash to kick start our economy
Robert, Glasgow

Prime Minister Gordon Brown was asked about this problem in the House of Commons on Wednesday because Abbey had just raised its tracker mortgage rates for new customers.

"We want the banks and building societies to pass on the interest rate cuts to their mortgage holders," he said.

"What we've been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary."

However, Lloyds TSB has promised to pass on any interest rate cut in full to its variable rate mortgage customers.

The group, which also lends through Cheltenham & Gloucester, says its standard variable rate, currently 6.5%, will never be more than 2% above Bank of England base rate.

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