Investors seek rate cut as stock market turmoil continues
Investors in the UK desperate for an interest rate cut will scour Bank of England minutes released today for hopeful signs amid continuing stock market turmoil.
Mervyn King, the Bank’s governor, warned last night that Britain was facing its greatest economic challenges in more than a decade over the coming year.
London’s FTSE 100 index bounced back yesterday to close up 3% on Monday’s disastrous performance after the US Federal Reserve cut its interest rates by three-quarters of a point.
In New York, the Dow Jones industrial average fell 465 points at the start of the session but recovered to finish down 126.24, or just over 1%.
UK Prime Minister Gordon Brown will meet his German, French and Italian counterparts, as well as European Union president Jose Manuel Barroso, for talks at Downing Street soon to discuss ways to tackle the causes of the turbulence.
Attention has now turned to whether the Bank of England will follow the Fed’s lead and introduce an emergency interest rate cut.
The Bank said it had no immediate plans to bring forward the next meeting of its Monetary Policy Committee (MPC), scheduled for February 6 and 7.
But all eyes will be on the publication today of the minutes of the MPC’s last meeting – at which it kept the rate at 5.5% – for clues to its future intentions.
Speaking to members of the Institute of Directors in Bristol, Mr King warned last night that food and energy prices were likely to rise this year, possibly pushing inflation over 3%.
He said: “The next year will pose economic challenges for all of us – more so than at any time since the Bank of England was given its independence in 1997.”
But he appeared to open the way for an interest rate cut, saying: “We face a difficult balancing act in the course of 2008.
“But we start the year from a position in which bank rate, at 5.5%, is probably bearing down on demand.”
Mr King accepted there was little that could be done to avoid some rise in inflation in 2008 but said the MPC was “determined” to keep it below the target of 2% in the medium term.
“It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor,” he told the meeting.
The Bank of England’s governor is required to write to Chancellor Alistair Darling if inflation goes above 3% or falls below 1%.
Mr King predicted that a “less buoyant” housing market would go “hand in hand” with slower consumer spending growth in 2008.
He said: “Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past.
“In the short run, that will slow economic activity, possibly quite sharply.”
On Monday the Footsie suffered its biggest one-day points drop since the September 11 2001 terrorist attacks, falling 323.5 points to 5578.2.
This took the index to its lowest level in about 18 months and almost equalled the dramatic 324-point fall seen on the day of 9/11.
There are fears that the Fed’s cuts – the biggest one-day move by the central bank in recent memory – may not be enough to head off a recession in America.
The Bank of England is widely expected to follow the US lead with a cut next month.
But businesses called on it to be ready to take action sooner if needed.
Unscheduled rate moves are rare in the UK. The Bank of England last made a surprise move to cut rates after 9/11, when the MPC voted to cut rates by a quarter point, amid stock market turbulence.
The Footsie is currently 11% below its opening mark for 2008 and has suffered the worst trading start to a year since records began.
