Page last updated at 10:17 GMT, Thursday, 4 September 2008 11:17 UK

Grim backdrop to UK rate decision

MPC member David Blanchflower
David Blanchflower has been a lone voice calling for rate cuts

The looming threat of recession has left the Bank of England under intense scrutiny as it prepares to announce its latest interest rate decision.

The Bank's Monetary Policy Committee is expected to keep rates on hold at 5% on Thursday despite evidence the economic outlook is fast deteriorating.

Output ground to a halt in the second quarter while consumer confidence has been shaken by tumbling house prices.

Many economists expect rates to fall soon despite inflation worries.

The threat of inflation, which has risen sharply to 4.4% in recent months, has deterred policymakers from taking any action.

But the fear of a prolonged recession over the next 18 months is expected to sway the MPC to ease borrowing before the end of 2008.

The OECD has forecast that the UK economy will contract in the current quarter and the next - meeting the official definition of a recession.

Chancellor Alistair Darling heightened concerns about the resilience of the economy when he said recently that conditions facing the UK and other countries were "arguably the worst in 60 years".

Gloomy forecasts about the economy have hit the pound, which has been falling against the dollar and the euro, and has had its worst month against the US currency since 1992.

Voting split

A three-way voting split on the MPC in recent months has highlighted the difficulties facing the body in the current troubled climate.

Arch-dove David Blanchflower has persistently called for rate cuts to support the faltering economy and has warned of a sharp jump in unemployment if no action is taken.

It now seems a question of when, rather than will, the Bank of England cut rates
Howard Archer, Global Insight

However, another external member of the MPC, Tim Besley, remains more hawkish, urging a rise in rates to contain inflation which many experts believe could soon hit 5%.

While the other seven members of the MPC have voted for rates to stay on hold for several months, many experts believe they will not be able to hold this line for much longer.

"It now seems a question of when, rather than will, the Bank of England cut rates," said Howard Archer, chief economist at Global Insight.

"The MPC has clearly become markedly more concerned about the current state of the economy and the growth outlook in recent weeks, acknowledging that recession is very possible."

Patrick Minford, professor of applied economics at Cardiff Business School, said the poor state of the economy warranted an immediate cut in rates as the impact of elevated fuel and food prices begins to ease.

"Inflation has been imported by oil and commodity prices, which are now coming down," he told the BBC.

"The economy has stopped growing and the housing market is plunging," he added.

'Act soon'

Some analysts reckon that rates could fall as low as 3.5% next year

With manufacturing output and business investment weakening and High Street confidence brittle, pressure is growing on the MPC to act sooner rather than later.

"A major recession can still be avoided, but the MPC cannot wait too long before acting," said David Kern, economic adviser to the British Chambers of Commerce.

"To reduce the threat of a severe economic downturn, the MPC must start cutting interest rates in October or November."


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