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MPC hints at further rate drops

The Monetary Policy Committee has hinted that there are further rate cuts to come in an attempt to keep the UK economy under control.

In it’s latest MPC minutes, the Bank explained why it had to take the unanimous decision to cut interest rates by 1.5 per cent.

It admitted that projections in the last Inflation Report implied that a very significant reduction in Bank Rate – possibly in excess of 200 basis points – might be required in order to meet the inflation target in the medium term. But it admitted that a cut of more than 2 per cent would have been too much of a shock on the economy.

One concern for the Bank was the Libor rates – it noted that the spreads remained elevated and was still substantially wider than it had been two months ago.

It also said the past two months had seen a substantial downward shift. It said: “the intensification of the financial turmoil into the worst banking crisis since the outbreak of the First World War, a further and marked decline in the short-run indicators for activity at home and abroad and the sharp falls in commodity prices and in measures of inflation expectations” all affected the MPC decision to cut at just 1.5 per cent.

It said: “There was a strong case for an immediate reduction in Bank Rate of at least 100 basis points. The upside risks to inflation from rising commodity prices and elevated inflation expectations had diminished markedly in recent weeks. That allowed the Committee to react aggressively to the downside risks to inflation from the deteriorating demand outlook.

“The credit tightening and its impact on the world economy had become much more acute, underlining the case for a substantial monetary loosening. Although some surprise was inevitable, the Committee should be prepared to react decisively in these circumstances.”

The Committee also said it would reassess the required scale of monetary easing after the chancellor’s Pre-Budget Report next week.

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