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EDITIONS
Wednesday, 18 April, 2001, 16:36 GMT 17:36 UK
Q&A: Will UK rates now be cut?
The Bank of England's Monetary Policy committee has already cut interest rates twice, but will the Fed decision mean that UK interest rates will be falling further? BBC News Online investigates.

Will the Fed rate cut influence the Bank of England?

The Bank of England always says it is independent and not directly influenced by US rate cuts.

However, the Fed decision is a sign that it believes the US slowdown is likely to be deeper and longer than previously thought - and therefore will have a greater effect on the UK.

UK industry is already starting to show signs that it is suffering from the global downturn. This latest move may have tipped the balance in favour of further cuts in rates.

Cutting the cost of borrowing yet again should stimulate confidence and domestic demand in the UK, helping to offset the impact of a US slowdown.

Moreover, with inflation having remained below the target for nearly two years, the Bank of England has room to cut interest rates, without worrying that the cost of living is about to soar.

But didn't the MPC just cut interest rates itself, at the beginning of April?

The Bank of England has already cut interest rates twice, mainly because inflation was low and on fears that the US slowdown will affect the UK economy.

Another reason were worries about the wider impact of foot-and-mouth disease on the economy.

Another worry for economists at the Bank of England is the state of the stock markets, which have fallen sharply since the beginning of the year.

This itself was the result of a string of profit warnings from major companies, an indication that not all is well in the economy.

So when could the Bank of England cut interest rates again?

The cost of borrowing is set by the Bank's Monetary Policy Committee. Its remit is to ensure inflation, excluding interest rates, is as close as possible to 2.5%.

The nine-strong panel meet for two days once a month. At the end of the meeting, the committee decides the level of interest rates by majority vote, and the announcement is made at noon.

The Governor of the Bank, Sir Edward George has the casting vote if there is no majority.

At its last meeting, six members of the MPC wanted interest rates cut by 0.25%, but three wanted an even deeper cut of 0.50%.

The next meeting will be held on 2-3 May.

What do lower interest rates mean for households?

In general, an interest rate cut makes it cheaper to borrow money - such as mortgages - but also reduces the income savers receive.

The interest rate the Bank of England sets is the one it uses when dealing with money markets.

It is up to individual commercial banks whether or not it passes on any changes to its borrowers and savers.

For borrowers, it is not always the case that changes in the base rates means a change in variable mortgage rate - especially when base rates are falling.

If variable mortgage rates do fall by 0.25%, however, this would save a homeowner with a 50,000 mortgage about 8 per month. On a 100,000 mortgage, the saving would be about 16 per month, according to the Halifax.

Equally, interest rates for savers may not necessarily fall. But where they do, it will mean an even smaller return for the millions of savers who already earn little on their funds by the standards of the last 30 years or so.

How low could rates go?

Experts continue to predict further rate cuts - to below 5% by the end of the summer.

The speed of further rate cuts, however, may be limited by the health of the overall economy.

So far, it is still in relatively good shape.

The number of people out of work and claiming unemployment benefit has fallen below one million for the first time since 1976.

Consumer spending is robust, while the housing market is buoyant - all boosted by changes in taxation announced in the March budget.

The UK has also been helped by the high level of sterling, which has kept inflation in check.

But with rates coming down around the world, the scope for further Bank of England rate cuts has clearly increased.

How effective is the Bank of England in setting interest rates?

The MPC was set up four years ago in May 1997, and is accountable to Parliament. During the first couple of years of its existence, it gained a reputation for anticipating inflatinoary pressures when changing rates.

It is now up to the MPC to see how quickly it can move in times of recession and slowdown.

The Bank's mandate ensures that it must act when inflation is too low - for example, during a slowdown - as well as when it is threatening to get out of control.

If inflation moves more than 1% away from its 2.5% target, on either side, the Governor has to write an open letter to the Chancellor of the Exchequer.

During the MPC's lifetime, inflation has hit its target in only a few months. However, over this time, inflation has never ventured outside of its "acceptable" range of 1.5% to 3.5%.

Officials at the Bank of England themselves admit this has been partly down to luck. Most experts predict that inflation will remain close to the target this year.

Will the UK economy feel the impact of the US slowdown?

Economic indicators

Analysis

UK rate decisions
Links to more Business stories are at the foot of the page.


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