Press Release Summary: One of the supposed iron laws of the Bank of England monetary policy committee (MPC) is that it does not cut interest rates two months in a row. Of course, this is a matter of precedent not of statute
Press Release Body: One of the supposed iron laws of the Bank of England monetary policy committee (MPC) is that it does not cut interest rates two months in a row. Of course, this is a matter of precedent not of statute; after all, if this was absolutely the case there would be no point in Mervyn King\'s policy making group meeting this month. But it is a matter of precedent.
Not only has the MPC never changed rates in successive months; it has also never done so by more than 0.25 per cent. Of course, both of these may simply be a fact that it has hitherto existed in a fairly benign economic environment. Partly, some would say, of its own making, a tribute to the effectiveness of its own decisions. But it was created by an incoming government in 1997 which had inherited an economy enjoying growth, falling unemployment and rising house prices.
How the MPC would deal with a major crisis situation has thus never been tested. Some would argue that the test has come now. What they decide to do this week and in the near future may have a major effect on property investment in the UK.
Last month\'s minutes revealed the committee considered breaking with their decade-long practice of only moving by 0.25 per cent by making a half-point reduction. While they decided against such a move, the fact that they considered disregarding one long-standing practice may mean they are willing to do so again.
Both moves were advocated this week by the director general of the British Retail Consortium, Kevin Hawkins. He called for an immediate 0.5 per cent cut after seeing high street sales enduring their weakest December since 2004.
This retail downturn, alongside other factors such as the slower housing market and the credit crunch were listed by Barclays Stockbrokers as the reason it believes the MPC will not just cut in successive months but three times in a row, with a 0.25 per cent reduction tomorrow followed by another in February. For good measure, Barclays predicted a further trimming in April, bringing the base rate down to 4.75 per cent before the daffodils have wilted.
Yet such boldness remains a minority position. In an Adfero poll of eight leading institutions, Simon Hayes of Barclays Capital was alone in expressing this opinion. Six of the eight predicted that there would be no change, while the Centre for Economics and Business Research expressed its view in terms of a percentage - with a 40 per cent chance of a January cut.
This poll broadly falls in line with the one carried out by Reuters, which found just 12 out of 63 forecasting a cut to 5.25 per cent and the other 51 expecting no hold. Yet if the majority expect precedent to be maintained, most of those who spoke to Adfero did not hold the view that this was even close to being certain. While HSBC suggested the inflation signals were sufficiently mixed to make February a much more likely date for the next change, Global Insight\'s chief UK economist said he would only \"marginally\" favour February on a \"very tight\" vote, while Ross Walker of the Royal Bank of Scotland spoke of a \"whiff of deja vu\" from a year ago, when most predicted a February rise and the MPC voted for one in January instead.
It may well be that the MPC will indeed decide successive rate cuts is a move too far. But if they do not, fewer economists will be surprised than the bald figures suggest.
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2025
