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Stephen Radley, economist
"The case for larger cuts in interest rates is certainly becoming a lot stronger"
 real 28k

General Secretary GMB Union John Edmonds
"We need some substantial cuts"
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Wednesday, 18 April, 2001, 15:53 GMT 16:53 UK
UK rates set to fall again
Bank of  England
The majority of the MPC favoured a cut
The Bank of England's Monetary Policy Committee (MPC) voted 6-3 to cut interest rates by 0.25% earlier this month - with the dissenters wanting a bigger fall.

Together with the surprise US rate cut on Wednesday, the minutes of the Bank's last meeting were taken as making another rate cut in the UK almost certain.

At the MPC meeting on 5 April, according to the report of proceedings, some members felt more bad news on the economic front could justify another interest-rate cut in the future.

"All members agreed that the prospects for the world economy now appeared rather weaker than at the Committee's previous meeting," the minutes said.

All members agreed that the prospects for the world economy now appeared rather weaker than at the Committee's previous meeting

MPC minutes
At the time, the Committee decided to cut UK interest rates by a quarter point to 5.5%.

The Bank's main lending rate was trimmed in response to falls in the stock market, the foot-and-mouth crisis and a slowdown in the global economy.

News on Wednesday that the Federal Reserve has cut US interest rates by a further half a point to 4.5% will no doubt bolster the case for another UK cut when the Bank of England meets in early May.

The MPC's task is to keep UK inflation at about 2.5%, but overall economic conditions play a role in its deliberations.

Underlying inflation is currently below the target at 1.9%.

Risk of a slowdown

The minutes show that the Committee agreed that the British economy now faces the risk of a slowdown.

But the MPC members differed in their view of how severe the downturn would be.

DeAnne Julius
DeAnne Julius, one of the MPC's doves, will be replaced next month
Committee member Ian Plenderleith joined traditional "doves" DeAnne Julius (at her final meeting) and Sushil Wadhwani in arguing for a 0.5% cut in April, rather than the 0.25% reduction that was agreed on.

The doves believed that weak inflation and the risk that confidence would deteriorate justified a 0.5% cut.

"If properly explained, (a 0.5% cut) might help bolster confidence rather than dent it," they said.

Not overreacting

However, the majority of members felt that the Bank of England should not overreact to downside risks.

The members argued that growth of domestic demand, the housing market and business investment all remained strong.

"Against this background, a greater than expected cut in interest rates at a time of fragile confidence could even prove to be counterproductive by implying that the prospect for the UK economy was seen to be worse than it was," they said.

Hopes of further cuts

City observers are confident that the minutes indicate the Bank of England is leaning toward more rate cuts.

This certainly increases the chance of a further rate cut

Jeremy Hawkins
Bank of America
"This certainly increases the chance of a further rate cut," said Jeremy Hawkins at Bank of America.

"We were expecting Julius and Wadhwani to go for a 50 basis point cut but the fact that they have been joined by Plenderleith... increases the chance of rates going down before the general election."

Paul Mortimer-Lee of BNP Paribas said: "Reading between the lines it's clear they wanted to cut by 50 basis points and will do it in two steps of 25 basis points each."

UK rates

The April rate cut was welcomed by industry, which has warned of job cuts as the economic slowdown in the US and Japan starts to impact on the UK.

Reacting to the release of the minutes, Ian Fletcher, head of policy at the British Chambers of Commerce, said: "The Bank has heeded business concerns and made clear it has both the scope and now the will to remedy the shortfall on the inflation target."

In February, the Bank of England had cut its interest rate for the first time in nearly two years by a quarter point to 5.75%.

The nine-strong panel meets for two days once a month. At the end of the meeting, the committee decides the level of interest rates by majority vote.

Ms Julius, one of the four outside experts on the Committee, will be replaced at the end of May by the Confederation of British Industry's chief economic adviser Kate Barker.

US downturn

In the UK - as in the rest of Europe - analysts fear a negative impact from the dramatic slowdown of the US economy.

Some even say that the United States is on the brink of recession, following a slew of corporate profits warning and disappointing earnings results.

The unexpected cut to US interest rates on Wednesday is the fourth time this year that the Federal Reserve has moved to counter the threat of recession.

The US base rate is now at 4.5% following four cuts of a half point each.

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See also:

05 Apr 01 | Business
Who's Who at the MPC
11 Apr 01 | Business
Europe keeps interest rates steady
21 Feb 01 | Business
Bank was unanimous on rate cut
21 Mar 01 | Business
UK rates firmly on hold
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