Should UK rates have been cut?

The Bank of England is under pressure to cut rates

BBC economics reporter Dharshini David examines the case for and against a cut in UK interest rates.

The case for a cut

In recent months, there has been a growing consensus that interest rates have peaked. The debate has now switched to the timing of the first cut.

There are several arguments for bringing rates down from their current level of 6%.

Perhaps the most pressing reason to bring rates down this month are recent events in the US

Manufacturers have been particularly vociferous in calling for lower rates.

Over the last few years, the strength of the pound against the euro has made their exports more expensive.

As a result, industry has struggled and has lost in excess of 150,000 jobs.

The most recent evidence suggests that exports are recovering, perhaps due to buoyant activity in Europe.

But exporters remain vulnerable to any global slowdown in activity.

Meanwhile, growth in the UK economy as a whole slowed between the second and third quarters of last year, according to the latest available figures.

Even with sturdy demand, inflation has been below the government's target for more than a year

Admittedly, growth remains fairly sturdy, and the UK is now entering its eighth consecutive year of expansion.

Nevertheless, even with sturdy demand, inflation has been below the government's target for more than a year.

And if oil prices, which bear little relation to the strength of the economy, hadn't risen, inflation would be still lower.

Perhaps the most pressing reason to bring rates have been recent events in the US.

Sir Edward's tricky dilemma

The Bank of England has warned that a global slowdown was the biggest risk to UK growth this year.

Not only may the US economy be slowing more rapidly than many had expected, but interest rates were unexpectedly cut there just last week.

If this is a sign of the depth of trouble the global economy is in, the Bank of England may want to cut rates as soon as possible.

This would help to stimulate activity in the UK and in our major trading partners, such as the US, by increasing UK demand for imported goods.

Such co-ordinated policy action between the US and UK happened in 1998, when both countries cut rates to prevent the Asian financial crisis causing a global recession.

But this time, it could be different.

The case against a cut

Unlike 1998, many experts argue, the domestic economy doesn't warrant lower rates yet.

Roger Bootle, economic adviser to Deloitte & Touche, says: "The purely domestic news about the UK has been pretty strong.

"Last week's numbers on consumer credit and mortgage approvals confirmed buoyant activity.

"This is in marked contrast to the US, where there are signs of a serious slowdown."

Consumer spending has driven growth in recent years, and as yet shows no conclusive signs of cooling off.

Retail spending has been sturdy, lending is strong and sentiment remains buoyant.

In his Budget and pre-Budget report last year, Gordon Brown pumped several billion pounds of public money into the economy.

This year's Budget, in March, could add to that total.

The Bank of England may want to wait to make sure any extra money doesn't boost consumer activity too much, before stimulating it further with lower rates.

Equally, consumers may see their fortunes improve from another source.

More than two-thirds of pay awards are determined in the first four months of the year.

And many workers also receive profit or performance related bonuses around this time.

With a tight labour market, these payments could be large, as employers battle to recruit and retain skilled staff.

Again, the Bank of England might want to wait and see how much extra money consumers have in their pockets - and whether this translates into higher, possible inflationary spending.

For these reasons, the majority of economists believed a rate cut was unlikely in January.

However, homeowners and savers may soon still see lower interest rates.

But they're likely to have to wait at least another month - if not longer.