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EDITIONS
Wednesday, 18 April, 2001, 17:23 GMT 18:23 UK
Will UK interest rates now fall further?
UK interest rates over the past two years
The pressure on the Bank of England to cut UK interest rates in early May will have increased with the Federal Reserve's surprise decision on Wednesday to cut US rates to 4.5%.

A UK cut by half a point, rather than the regular quarter point cut, might even be possible after minutes from the Bank of England's meeting earlier this month showed that some doves had called for a larger cut on 5 April.

But, although developments in the US are worrying for the UK's economy in the long-term, the Bank of England will be keen to stress that economic indicators, such as domestic demand, the housing market and business investment, remain strong.

World recession looms

When the Bank of England cut interest rates by 0.25% in April, in a 6-3 vote, it cited downside risks to UK activity from the slowdown in the global economy, the recent fall in equity markets and, in the short run, from foot-and-mouth disease.

Since then, fears over the global repercussions of the slowdown in the US economy have intensified, with a slew of US companies issuing profit warnings, cutting jobs and reporting disappointing results.

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

The Japanese central bank has returned to zero interest rates in another desperate attempt to revive growth and consumer spending.

Benign inflation

The Bank of England's principal task is to keep UK inflation at about 2.5%, and underlying inflation is currently stuck well below that target.

This relatively 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 keen not to overreact to downside risks.

The Bank of England's April minutes shows that they argued for a smaller cut.

"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.

Indeed, unemployment has fallen below one million and house prices are continuing to increase steadily after a brief pause at the end of last year.

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 more politically acceptable to make any moves before or after the election campaign.

Commenting on the minutes of the Bank's April meeting, Jeremy Hawkins of Bank of America said: "We think there will be another 50 basis point cut before we hit the bottom of the cycle.

"The timing of the election may be a factor. It's difficult to see a rate cut in June, we see one in May or July."

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.

The foot-and-mouth crisis is also seen as likely to cut UK economic growth this year.

Taken together it seems there will soon be a green light for a further rate cut, especially if there are further signs of UK output slowing in the months ahead.


Signs of a slowdown

Analysis

Key players
See also:

20 Mar 01 | Business
08 Mar 01 | Business
21 Feb 01 | Business
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