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MPC considered sub 2% base rate

The Monetary Policy Committee considered dropping Bank base rate by more than 1 per cent during its last meeting.

The MPC decided to drop base rate to 2 per cent two week ago, but thought a drop of more than 3 per cent in eight weeks was too severe for the economy.

“The Committee agreed that a cut of at least 100 basis points was needed,” reported the MPC today, “and a number of arguments were advanced against a larger cut, to which different members attached different weights.”

It says there was a risk that going further than 1 per cent could have caused an excessive fall in the exchange rate. This fear may have been warranted in the wake of the Sterling crash over the last fortnight.

The MPC aid special attention to the current banking crisis in UK; it said that the banks and many other financial institutions needed to continue to reduce their leverage. But it warned that if they attempted to do that too quickly, by constraining their lending, they would reinforce the downward pressures on the real economy.

It admitted that interest rate changes were not the right instrument to tackle credit supply constraints. It said only recapitalisation schemes and guarantee funding would turn the UK credit crisis round.

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