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Tuesday, 20 March, 2001, 19:15 GMT
Will UK interest rates now fall further?
Interest rates in the UK over the past four years
The last time the US central bank cut interest rates, back in January, it was not long before the Bank of England's Monetary Policy Committee followed suit.

But the size of the UK rate cut in February, 0.25%, was far smaller than the two cuts announced by the Fed, which amounted to 1%.

After Tuesday's Fed rate cut - its third rate cut this year - most experts believe that another UK rate cut in on the cards - although the Bank will be careful to point out that it takes decisions on the basis of the situation of the UK economy.

However, as before, rates are likely to fall by just 0.25% again.

The reason is that, although developments in the US are worrying for the UK's economy in the long-term, it is not yet in recession.

One thing, generally accepted, is that the Bank of England Monetary Policy Committee's next interest rate intervention will be to lower them, as part of a worldwide move to lower rates.

But mortgage holders beware. The competition between mortgage lenders has already led to cuts in rates and reduced margins in anticipation of another rate cut, and many lenders may decide not to cut their rates this time.

World recession looms

When the Bank of England cut interest rates by 0.25% in February, in a unanimous vote, the MPC said that it was doing so as an insurance policy against the possibility of the US slowdown. And it said it would take a gradual approach to further rate cuts.

Since then, fears over the global repercussions of the slowdown in the US economy have intensified, leading some members to ask for a bigger rate reduction.

And worries about Japan have added to fears of a worldwide slump.

Unions and industry say another rate cut would not risk stimulating underlying inflation, which has stood below the government's 2.5% target for 23 months in a row, despite having ticked up to 1.9% in February

The price of oil, a major factor in inflation calculations, has fallen to about $25 a barrel compared with $34 in the autumn - although Opec production cuts may cause it to rise again.

Wages and house prices

The benign inflation framework gives the Bank of England some slack to decide when to move again on interest rates.

The "inflation hawks" on the committee are still worried by the possibility of a wage and house price spiral, with unemployment falling below 1 million for the first time in a generation.

Average wages are rising at 4.5% annually, just below the level the Bank has said would cause it worries about inflation.

And house prices have begun moving upwards again after a pause around the New Year.

Another worry for inflation hawks is the value of the pound sterling.

Any sharp fall in its value would boost inflation by making imported goods more expensive.

However, as the US and other central banks cut rates, it gives more scope for the UK to lower its own rates without sterling becoming an unattractive currency.

Election looming

Another factor that could influence the Bank of England is the timing of any General Election.

The Bank has said that, since it is now independent of the government, it would not necessarily have to stay its hand during an election campaign.

However, it would be politically more acceptable to make any moves before or after the election campaign - which might mean as soon as April 5.

Gordon Brown's recent Budget did not change his broad fiscal parameters - as all the money he gave away in tax cuts was accounted for by the extra tax receipts he received this year.

That could give the green light to a further rate cut, especially if there are further signs of UK output slowing in the months ahead.

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See also:

20 Mar 01 | Business
UK inflation nudges up to 1.9%
08 Mar 01 | Business
Interest rates left unchanged
21 Feb 01 | Business
Bank was unanimous on rate cut
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