Could the 'gift' of a rates cut save economy?

THE BANK of England looks almost certain to cut interest rates next Thursday, in what many will see as an early Christmas present for the UK economy.

- By HARVEY JONES

Markets reckon there's a 92% chance of a 0.25% cut to 3.75% - down from today’s 4%. It would mark the fourth rate cut this year, and the sixth since August last year, when the BoE started cutting rates from their 5.25% peak.Cheaper borrowing will be good news for mortgage holders and anyone feeling the squeeze. It may also give a lift to stock markets, although that isn’t guaranteed.

The US Federal Reserve cut rates to 3.75% last week and investors greeted the news with a shrug.

Unfortunately, rate cuts are bad news for savers, who will get a lower return on cash. That's a concern with inflation still high at 3.6% in October.

OUTLOOK

Samuel Mather-Holgate, MD at Mather and Murray Financial, said the BoE doesn't blindly follow the Fed, but the US rate cut bodes well.

He says there's even a slim chance of a bigger move this week. “I believe markets are underestimating the possibility of a 0.5% mega-cut in the base rate, as the BoE seeks to get ahead of the curve for once.”

On Wednesday, the day before the BoE decision, November's consumer price inflation figure is published, and if it’s higher than 3.6%, there is a slim chance the Bank won't cut at all.

Victoria Scholar, head of investment at interactive investor, said: “While markets are braced for a fourth cut of the year, after reductions in February, May and August, this may still depend on latest inflation data”