Market measures are more important than rate decisions, New Star chief economist Simon Ward has warned.
He points out that three-month sterling LIBOR eased to 5.93 per cent at its fixing today but remains detached from Bank rate at 5.25 per cent.
Ward says: “As well as the appropriate level of official rates, the MPC ought to discuss ways of closing this gap at its meeting this week.”
He adds: “The Bank of England’s money market operations are no longer a technical adjunct of the policy process but have become central to achieving the MPC’s aims.
“Mervyn King has promised new facilities to ease banks’ longer-term funding difficulties. The form and scope of such measures should be discussed and decided upon by the full MPC, not a select group of Bank officials. To emphasise its increased focus on market rates, the MPC could communicate its plans for narrowing LIBOR / Bank rate spreads along with its rate decision at midday on Thursday.”
Ward says his own MPC-ometer has suggested that financial market pressures warranted a cut in bank rate last month. It is also forecasting a cut for this month, forecasting a 6-3 vote for a quarter-point ease.