BoE must cut rates today
6 Dec 07

Tomorrow, the Bank of England will announce their interest rate decision. As I have consistently argued, a rate cut of 0.25% is necessary and is echoed in a brilliant article by Anatole Kaletsky of The Times today.

He points out that the difference between the LIBOR and the Base rate is usually at around 0.1%, but the LIBOR currently stands at around 1% above. A small difference shows that MPC rate decisions are being reflected in markets elsewhere but this opening gap shows that the money markets have been spooked so much by the recent credit crunch that they seem not to pay attention to the MPC decisions.

Therefore, businesses and homeowners have effectively faced a one percent rise in interest rates despite rates being kept "on hold". However, the BoE now need to act and cut rates to prevent a recession and a banking collapse. A cut would be a relief, but will not prevent a slowdown next year - however, it will make the slowdown more moderate.

Kaletsky argues that despite the problems of the credit crunch originating in the US, Britain is more vulnerable at the moment. He points out 5 reasons why:

1) Britain's housing market is more vulnerable than the US'
2) British banks have proven to be in more danger - Northern Rock!
3) Britain is structurally more vulnerable as its growth has been driven by i) finance, ii) housing and iii) public sector spending, all of which are starting to unwind.
4) A declining dollar and lower long term US interest rates will boost the US economy next year.
5) The Fed has been more quick to act. It has cut rates by 0.75% since August, whereas the BoE has not done much.

Links:
The Bank better get this right - Anatole Kaletsky, The Times (6 Dec 07)