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Wednesday, October 21, 1998 Published at 21:14 GMT 22:14 UK

Business: The Economy

Mixed signals on further rate cuts

Analysts say a further rate cut in November is now likely

There are mixed signals on the chances of further falls in UK interest rates.

The release of the minutes of the last meeting of the Bank of England's Monetary Policy Committee (MPC) have raised rate-cut expectations but comments since by the Bank's Governor Eddie George point the other way.

Seven members of the MPC voted for a 0.25% drop two weeks ago, while two voted for a bigger cut, the minutes of the meeting showed.

However, comments by Bank of England Governor Eddie George since the minutes were released suggest he thinks the worst is over.

[ image: Bank of England governor Eddie George voted for a 0.25% cut]
Bank of England governor Eddie George voted for a 0.25% cut
Mr George has said the outlook for the global economy is better than expected only two or three weeks ago and recent events are "quite encouraging".

Speaking to the Financial Forum of West Flanders in Belgium, Mr George said developments since the annual International Monetary Fund had been positive.

The comments will reduce somewhat the heightening expectations that the Bank of England's Monetary Policy Committee is poised to reduce interest rates further at its next monthly meeting.

Rates were reduced to 7.25% at the meeting held earlier this month - the first time the committee has voted for a reduction since its formation after the General Election.

Bank Governor Eddie George, Mervyn King, David Clementi, Alan Budd, Charles Goodhart, Ian Plenderleith and John Vickers all voted to shave a quarter point off rates.

Former hawk Willem Buiter and long-time dove DeAnne Julius "preferred a larger cut in interest rates".

Simon Briscoe, economist at City bank Nikko Europe, said: "This is a stronger display of willingness to cut rates than anyone expected.

"The fact that there was no-one who was concerned and that two were gunning for more does suggest there will be further cuts in November."

Concern over global crisis

The minutes show the MPC was concerned about the spread of the financial crisis across the globe and the effect it would have on the UK economy.

It added that further cuts in rates would be required if the shortage of lending, known as a "credit crunch", seen elsewhere in the world hit the UK.

The committee had come under tremendous pressure for a rate cut from business, unions and the government, with Chancellor Gordon Brown hinting strongly that he hoped for a cut.

But the MPC said while it noted the views of "outside commentators" it had to reach its own assessment of the situation.

The minutes also revealed that for the first time, the committee was not pondering whether to drop rates, but only by how much they should be cut.

Those calling for bigger cuts said a 0.25% reduction would be insufficient to stop a more substantial fall in economic output and rise in unemployment.

This would lead to inflation under-shooting the government's 2.5% target, it was argued.

But the majority took the view that a bigger cut was not required.

Pressure grows

General Secretary of the Manufacturing, Science and Finance Union, Roger Lyons, welcomed the minutes.

He said: "There are two people inside the MPC who have grasped finally the seriousness of the situation the British economy is in.

"It is time the rest, including the Governor Eddie George, woke up to reality."

The Director-General of the CBI, Adair Turner, added his voice to calls for larger rate cuts in the future.

"The key thing is that central banks have to be willing in this environment, if events move yet further in a deflationary direction, to move with sufficient forcefulness," he said.

The committee has also come under pressure to make an emergency rate cuts after the Federal Reserve in the US held an emergency meeting and imposed a 0.25% cut for a second time in two weeks.

However most commentators expect the MPC to wait until its meeting on 4 and 5 November.

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