UK: Perilous state of economy revealed by MPC’s shock move

The perilous state of the UK economy was exposed as the Bank of England’s Monetary Policy Committee made an unprecedented 1.5 percentage point cut in interest rates.

Winston Churchill meets the Queen in 1955. Photo: PA

The shock vote brought interest rates down to 3pc for the first time since January 1955, when Winston Churchill was prime minister. Economists forecast that the cut could pave the way for further reductions – with some claiming that rates could hit a historic low of 1pc.

Thursday’s move was interpreted as a desperate attempt to protect the UK economy from a severe recession.

“There has been a very marked deterioration in the outlook for economic activity at home and abroad,” said the MPC in an explanatory statement, adding that the threat of inflation was now receding.

It warned that after the most serious crisis in the global banking sector for almost a century, households and businesses were likely to find it difficult to obtain credit “for some time.” The MPC counted falling share prices, a sharp reduction in UK output, and a squeeze on household budgets among a nasty cocktail of circumstances that have combined to hit both businesses and consumers hard.

The MPC’s decision came amid a raft of gloomy news and data emerged. Figures from Halifax, the UK’s biggest mortgage lender, showed that house prices have fallen by 15pc over the past 12 months.

It was the sharpest drop since the survey began in 1983 and brought the average house price down to £168,176 in October, compared with almost £200,000 in the same month last year.

In the business world, steelmaker Corus said that it would cut 400 jobs from its regional distribution business in the UK because of the economic downturn, and the motor industry announced the biggest fall in sales in 17 years.

All that came as the International Monetary Fund predicted in its latest growth figures that the UK will be the worst hit major economy during the downturn, shrinking by 1.3pc next year.

The radical move by the MPC to cut rates by 1.5 points was welcomed by economists and business groups, who were widely expecting a more modest 0.5 point cut, but many warned that it would not be enough to avoid a recession.

“In our view, the MPC deserve credit for being willing to cut aggressively … even though UK rates probably are not yet low enough to pave the way to recovery, the scale of easing signals that the MPC will do whatever it takes to avoid an unnecessarily deep recession and establish a route back to eventual recovery,” said Michael Saunders, economist at Citigroup.

The Federation of Small Businesses said the “unexpectedly large” cut would make an “enormous” difference to small firms.

Some however said that the MPC should have taken action before yesterday to prevent the depth of the crisis the UK now finds itself in.

Among them were Patrick Minford, professor of applied economics at Cardiff Business School and a former adviser to the Treasury. He said: “It’s a good move. Obviously it would have been better if they’d done it earlier as they were well behind the situation. They should have cut much earlier as the Fed did.”

Yesterday’s cut in interest rates dwarfed a 0.5 point cut made by the European Central Bank on the same day, and took interest rates in the UK below the eurozone level for the first time since the creation of the single currency.

Roger Bootle, economic adviser to Deloitte, said that the MPC should make further aggressive rate cuts: “I think that they will need to fall to 1pc. Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan,” he said

By Angela Monaghan
Last Updated: 3:33PM GMT 07 Nov 2008

Source: The Telegraph

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