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Bank considered bigger rate cut Bank considered bigger rate cut
(about 2 hours later)
The Bank of England's rate-setting body voted 9-0 to cut rates to 2% this month and considered a bigger move, minutes from its meeting have shown.The Bank of England's rate-setting body voted 9-0 to cut rates to 2% this month and considered a bigger move, minutes from its meeting have shown.
The monetary policy committee (MPC) agreed that a cut in the Bank rate from 3% to 2% was the minimum needed. The Monetary Policy Committee (MPC) agreed that a cut in the Bank rate from 3% to 2% was the minimum needed.
However, it avoided a deeper cut on concerns it could hit the pound and undermine confidence in the economy.However, it avoided a deeper cut on concerns it could hit the pound and undermine confidence in the economy.
The minutes are likely to reinforce expectations that UK rates will fall further in the months ahead. Analysts said the minutes indicated that UK interest rates would fall further in the months ahead.
Sterling falls The pound fell to another record low against the euro, with one pound worth 1.0984 euros, following the release of the minutes as expectations grew of further hefty rate cuts.
The weak state of the UK economy was also emphasised by the release of new unemployment data, which showed the highest jobless total for more than a decade.
Balancing act
The minutes showed that the MPC considered that a cut in the Bank rate to below 2% might be justified given the problems facing the economy.The minutes showed that the MPC considered that a cut in the Bank rate to below 2% might be justified given the problems facing the economy.
It's abundantly clear the MPC feels the stance of policy is still out of kilter with economic prospects Philip Shaw, Investec The Monetary Policy Committee could soon be following the US Fed in cutting interest rates very close to zero Jonathan Loynes, Capital Economics
However, the committee noted that financial markets were expecting a one percentage point cut, and "there was a risk that going further could cause an excessive fall in the exchange rate".However, the committee noted that financial markets were expecting a one percentage point cut, and "there was a risk that going further could cause an excessive fall in the exchange rate".
"There was also a risk that an unexpectedly large cut could undermine confidence in the economy more widely.""There was also a risk that an unexpectedly large cut could undermine confidence in the economy more widely."
The pound fell to another record low against the euro, with one pound worth 1.0984 euros, following the release of the minutes as expectations grew of further rate cuts. The MPC welcomed the temporary VAT cut that was introduced by Chancellor Alistair Darling in pre-Budget report.
The weak state of the UK economy was also emphasised by the release of new unemployment data, which showed the highest jobless total for more than a decade. "The timing of discretionary spending changes announced in the pre-Budget report and the cut in VAT were likely to be helpful in offsetting the downside risks to output growth in 2009," it said.
The committee also noted the importance of getting bank lending levels to recover.
However, it agreed that cutting the Bank rate was "not the right policy instrument to tackle supply constraints in the credit market".
"Further measures to underpin lending growth would be needed, building on the government's package announced in October to recapitalise and guarantee funding to the banks," the minutes said.
Inflation slowing
Nearly all analysts are now expecting further sharp cuts in UK interest rates in the new year.
"It's abundantly clear the MPC feels the stance of policy is still out of kilter with economic prospects," said Philip Shaw at Investec."It's abundantly clear the MPC feels the stance of policy is still out of kilter with economic prospects," said Philip Shaw at Investec.
"We certainly think that another 50 basis point cut is due at the next meeting and our central case for interest rates remains they will dip below 1% in Q2. "We certainly think that another 50 basis point cut is due at the next meeting and our central case for interest rates remains they will dip below 1% in Q2."
"The labour market data reinforce the background of a very weak economy with a horrendous 76,000 rise in the claimant count and employment beginning to fall sharply." Jonathan Loynes, chief European economist at Capital Economics, said: "December's MPC minutes and the latest labour market data support the view that the Monetary Policy Committee could soon be following the US Fed in cutting interest rates very close to zero."
On Tuesday, the latest inflation figures showed that the rate dropped to 4.1% in November. On Tuesday, the latest inflation figures showed that the CPI rate dropped to 4.1% in November.
Although this was still well above the 2% target rate, in a letter to Chancellor Alistair Darling the Bank of England governor, Mervyn King, said that inflation was set to fall "materially" below the target rate in the second half of 2009. Although this was still well above the 2% target rate, the Bank of England governor, Mervyn King, said in a letter to the chancellor that inflation was set to fall "materially" below the target rate in the second half of 2009.