Thrifty Loans

Earlier this week the US Federal Reserve cut its interest rate by 0.75% to 3.5% - a once-in-a-generation event that reflects how seriously the American authorities view the recent turn of events in world stock markets. Normally, the Fed, like the Bank of England, prefers to ease interest rates down gently at a quarter point at a time, so the decision to reduce interest rates by 0.75 of a point in one go is the most swingeing cut in a quarter of a century.

The minutes from the Bank of England Monetary Policy Committee meeting to set interest rates in January show that just one member voted to cut interest rates, which may indicate that February’s vote may be closer than  previously thought, and very unlikely to vote for a big cut like the US.

The minutes show that the majority of the committee thought that short-term inflation was a threat, and still remained the greatest risk. They were concerned about falling house prices, tightening credit conditions and their effect on consumer demand. However, the recent increases in the cost of energy supplies and the rising cost of petrol and food ‘could put substantial upward pressure’ on inflation, according to the minutes.

As the MPC’s minutes indicated that they were concerned that back-to-back rate cuts might suggest the Bank was ‘focused more on stabilising demand that meeting the inflation target’ it is unlikely that any rate cut in February will be more than 0.25%.

Governor of the Bank Mervyn King said that the UK economy faced its toughest challenge since 1997, ruling out a US-style intervention, saying that the financial system couldn’t be salvaged by dramatic cuts in borrowing costs.

He did say: “We start the year from a position in which the Bank Rate, at 5.5%, is probably bearing down on demand.”

When the next MPC meeting comes round in early February, the MPC will have the Bank’s quarterly inflation report, which will almost certainly be enough to justify another rate cut.