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Tight credit conditions 'to move BoE's hand on interest rates'

03 April 2008

Lack of liquidity in global credit markets is likely to have a downside on the British economy in the short term and could cause the Bank of England (BoE) to cut interest rates to five per cent, Global Insight has predicted.

Next Thursday's decision will follow a 0.25 point cut in February's meeting and a steadying at the March meeting, and economists are split on which way the bank will go next week.

Howard Archer, chief European and UK economist for the company, said that the threat of inflation might stay the BoE's hand on the interest rate lever, but concerns over credit availability would probably take precedence.

"We believe that the increasing downside risks to UK growth stemming from tight credit conditions will prompt the Bank of England to trim interest rates by a further 25 basis points to five per cent at its April meeting," he said.

Mr Archer added that he believed interest rates would bottom out at four per cent in the first half of 2009.

Despite central banks injecting increased liquidity into the system, British based banks have slashed the mortgage products on offer by some 60 per cent since the 'credit crunch' began in August 2007 and began to tighten its grip earlier this year.