The Bank of England is widely anticipated to cut interest rates tomorrow as fears of a recession in the UK grow.
While the monetary policy committee (MPC) members will still try to hold back inflation, the needs of the economy along with slowing house prices and consumer confidence are expected to dominate discussions.
A 0.25 per cent drop in the base rate to five per cent is widely expected – as a greater cut would send at messages of panic.
Henk Potts, equity strategist at Barclays Stockbrokers, said: “Pressure has been building and building on the Bank of England to reduce interest rates as the economic picture deteriorates and property prices fall.
“Recent evidence also suggests the credit crunch is starting to contaminate the wider economy.”
He added the Bank did have room to manoeuvre over inflation, as although it is currently high and will rise further, slower growth will bring down rising prices in 2009.
Mr Potts added: “We think the MPC will cut rates by 0.25 per cent on Thursday and by a further 0.5 per cent by August, taking rates back to 4.5 per cent.”
However, if Bank rate cuts are to filter through to the general public, market measures are needed to cut the gap between the base rate and the London interbank offered rate (Libor).
“As well as the appropriate level of official rates, the MPC ought to discuss ways of closing the gap [between the base rate and Libor] at its meeting this week,” said Simon Ward, chief economist at New Star.
“The Bank of England’s money market operations are no longer a technical adjunct of the policy process but have become central to achieving the MPC’s aims.”
He added: “Mervyn King has promised new facilities to ease banks’ longer-term funding difficulties. The form and scope of such measures should be discussed and decided upon by the full MPC, not a select group of Bank officials.
“To emphasise its increased focus on market rates, the MPC could communicate its plans for narrowing Libor / Bank rate spreads along with its rate decision at midday on Thursday.”
He went on to predict a six to three MPC vote in favour a quarter percentage point cut.
Meanwhile, chancellor Alistair Darling is set to put more pressure on banks to bring down interest rates, through the establishment of a taskforce with the industry.
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