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Talk of interest rate cut heats up

The inflation rate coming it at 1.8 per cent, a two-year low, has fuelled talk in some quarters of the Bank of England potentially reversing its recent direction and cutting interest rates.

Adding fuel to this is the fact that, despite the Monetary Policy Committee minutes that covered the last interest rate decision saying that policy would be tightened “at a gradual pace and to a limited extent,” recent remarks from MPC member Gertjan Vlieghe suggest the bank being open to a different direction.

In a speech given today at the Resolution Foundation, Vlieghe talks of how under the assumption that economist trends continue as they are today, upping the base rate by 0.25 per cent a year “seems a reasonable central case.”

However, he adds that “in the case of a no-deal [Brexit] scenario I judge that an easing or an extended pause in monetary policy is more likely to be the appropriate policy response than a tightening.”

On 13 February, reacting to the Land Registry data that showed a monthly house price rise of 0.2 per cent in December, Octane Capital chief executive Jonathan Samuels tabled the idea of a rate cut, citing the “bearish” view the Bank of England is taking on Brexit.

He adds that “[the BoE] certainly has the wiggle room now given that inflation is below target.”

SPF Private Clients chief executive Mark Harris is of the same opinion, especially if the UK slips back into recession. “Adjusting interest rates is one of the few tools available to the bank to give the economy a boost,” he says.

Coreco director Andrew Montlake says that the decision is entirely reliant on the Brexit outcome. “If Brexit goes south, the BoE will need stimulus again… if it’s sorted then there’s no reason to see a drop and we’ll probably see an increase this year,” he says.

Scottish Friendly savings specialist Kevin Brown espouses a wait-and-see approach. “With inflation falling to its lowest level since January 2017, the BoE has the breathing space to wait for Brexit negotiations to play out. At this stage it is difficult to predict which way inflation and interest rates will go as so much hinges on the UK’s departure from the EU.

“The indication from the Bank of England is that inflation is most likely to rise again this year which would suggest rates are likely to increase too.”

Moneyfacts financial expert Rachel Springall points out that with inflation below its target, the BoE would usually cut rates.

“However,” she adds, “we are not in a usual territory… I think as we move further towards the end of March we may well get more idea on what might happen with rates, but it may not be put in black and white.”

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  • Simon Murray 14th February 2019 at 6:34 pm

    All very pointless as no idea on outcomes other than that there may be a temporary spike in inflation. Any economist knows that interest rates are a very limited tool that can only reduce controllable pressures such as wage inflation but not external influences such as the cost of imports and at these historic lows can only provide very limited stimulus to the economy. Think time better spent on getting the government to provide clarity on where we are going.