08 October, 2008

It has been reported that Mervyn King, the Bank of England's Governor, is under severe stress to cut interest rates this week to deal with a possible recession.

The Monetary Policy Committee (MPC) is to meet on Wednesday with a declaration on Thursday lunchtime and many economists consider that a quarter point decline is expected. However, rates have remained the same since April in a bid to control rising inflation.

Global Insight is expecting that the Bank will slash rates by a quarter of a point to 4.75% this week with a 'real chance' of a half-point downfall. It added that the rate will drop to 3.25% in 2009, below the 50-year low of 3.5% in 2003.

However, the last time the Bank of England slash rates by a half-point was in November 2001.

Howard Archer, Global Insight's chief UK economist, explains that the further tightening of lending criteria and higher market interest rates will be of major concern to the Bank.

Meanwhile, Michael Saunders, Citigroup's UK economist, is expecting that rates could get down to 3.25%. He added that if monetary situations continue to deteriorate, rates may have to go even lower.

David Blanchflower, a member of the MPC has been calling for big slash in rates and is now approaching for an even larger downfall to rescue the economy from depression. Last month, Mr Blanchflower was only one of the nine-member committee who voted for a downfall.

The prediction of lower interest rates come as Prime Minister Gordon Brown has met with European leaders in Paris. The PM is calling for a new £12 billion fund to help small businesses through the present fiscal crunch.

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