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MPC united over 'clear and present' danger

The BoE vote to cut UK interest rates to earlier this month was unanimous, minutes show...

Policymakers also discussed whether the prospect of slower growth meant a bigger rate cut might be needed. Analysts said the unanimous vote could boost expectations of another interest rate cut early next year. It was the first time since November 2001 that the bank's policymakers were united in their decision to cut rates.

Economists had thought that two or three members of the Bank's Monetary Policy Committee (MPC) would have opposed the cut. On 6 December, the Bank cut the cost of borrowing for the first time since August 2005 in a bid to combat slower economic growth and the impact of an ongoing global credit squeeze.

"With the MPC voting unanimously in favour of easing, a back-to-back cut should be on the cards at the January MPC meeting," said David Brown, an economist at Bear Stearns. It looks like deepening concerns about the contagion risks from the credit crunch have superseded their fears about inflation."

Increasing the upside

The Bank said that the risk to the economy from a deterioration in financial market conditions outweighed the threat of rising prices and quicker inflation. In a statement the Bank said that it cut rates because "signs of slowing growth in the industrial world were already apparent. That suggested a substantial loosening in policy might be needed”.

However, the Bank said that it did not cut interest rates by more than a quarter of a percentage point because a large reduction in the main Bank rate now "would increase the upside risk to inflation".

Rising food and petrol prices have buoyed inflation in recent months. Official figures on Tuesday showed that the annual rate of consumer price inflation was unchanged at 2.1% last month, just above the government's target of 2%.

"The MPC was still worried about high inflation expectations, and lingering inflation concerns might still prompt it to hold off from cutting again until February," said Vicky Redwood, economist at Capital Economics.

Long overdue action

Chief Executive of Assetz, Stuart Law, commented: “Following the long overdue move by the Bank of England's Monetary Policy Committee (MPC) to drop interest rates this month, it has emerged that the decision was taken with a nine-to-zero majority.

“It is good to see, from this unanimous verdict, that the MPC is finally reacting to the very clear and present dangers of the credit crunch, as opposed to the far more vague concerns in relation to inflation. Inflation will end the year pretty much bang-on its 2% target and I would expect further downward movement below target in the spring, allowing interest rate cuts to take place quickly.

“The drop in interest rates this month is already benefiting borrowers, particularly those on base-rate tracker mortgages, and the recent injection of huge liquidity into the money markets should see off the credit-crunch concerns but leave homeowners and buy-to-let investors with much lower mortgage rates.

“Following the latest, unanimous voting news from the MPC, I am confident that we will see another two decreases in base rates by March next year, down to 5.0%. In fact, we could indeed see further drops later in the year with rates dropping to as little as 4.0 – 4.5%.

Golden opportunity for FTBs

Mr Law concluded: “First time buyers, whilst likely to be nervous from recent press comment, have a golden opportunity over the next few months to pick up a bargain from a developer or vendor looking to sell quickly. I would recommend they move quickly to take advantage of reducing interest rates over coming months whilst getting a great property price. The massive shortage of property in the UK will not go away for many years or even decades to come, and prices will strengthen again in due course as a result.

“With regard to property investment confidence, rental demand remains the key short term driver. RICS has recorded tenancy demand above available supply of property for three years now, and according to recent RICS, ARLA and Paragon surveys, rents are already up, rising by as much as 10% in many regions and 19.3% on average in London for 2007.”