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No Rate Cut this week, predict experts

Jude Buttle

Despite Monetary Policy Committee (MPC) member David Blanchflower hinting in a recent interview that he will try to persuade his MPC colleagues to lower interest rates by 0.5% this week, economists predict that the rates will remain the same in September while inflation continues to soar.

Most of the MPC has taken the view that the rate should remain on hold for now to balance between the risk of higher inflation and concerns about economic slowdown.

With inflation expected to exceed 5% later this year after the Consumer Prices Index recorded 4.4% last month - more than double the Bank of England's 2% - experts believe the possibility of a rate cut before November is doubtful.

Richard Dingwall-Smith, chief economist at Scottish Windows Investment Partnership, said a November cut is possible, although he thinks the Bank should opt for several sharp cuts from February next year. "Anything before November is very unlikely," he said.

David Kern, economic adviser to the British Chambers of Commerce, which has issued several vociferous warnings of recession, stated that the MPC should not hesitate any longer.

He said: "We understand the MPC's concern over inflation. But the MPC's own analysis suggests that inflation will peak in the next two to three months and will fall sharply next year. A major recession can still be avoided, but the MPC cannot wait too long before acting. The MPC must start cutting interest rates in October or November."

Graeme Leach, chief economist at the Institute of Directors, warned people not to expect too much too soon, yet offered some hope by forecasting that there could be a "small chance" of a quarter-point cut by the end of the year.

He added: "We don't think they [the MPC] will move this month and we predict that we will see a lot more evidence of slowdown before they move."

The rate has remained at 5% since the last change on April 10^th this year when the Bank of England reduced it by 0.25%.

If the rate does come down on 4^th September it could ease pressure on the cost of loans and mortgages, which would be good news for borrowers and give a much needed boost to the property market.