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BoE needs to cut interest rates

The Ernst & Young Item Club, an economic forecasting group in the UK, has stated that the Bank of England now needs to start looking at cutting interest rates in order to lift the economy, amidst fears that growth in the UK could fall by 1% in 2008.

Interest rates have been hiked up five times since August 2006, taking the base rate from 4.5% to 5.75%, its highest in six years. For the past couple of months the interest rate has remained static.

One analyst from the group stated: "Until recently, many analysts were expecting the Bank to up rates again to keep inflation under control. However, this has all changed in light of the current turmoil in the markets. A cut would show that the Bank of England is at last responding with appropriate vigour to the risks to UK growth and consumer confidence."

A number of analysts and economists have predicted that as a result of CPI inflation coming under the government's target of 2%, and also as a result of the credit crunch that is affecting UK and global financial markets, it is unlikely that the Bank of England will look at raising interest rates again this year, which is good news for consumers on variable rate mortgages who have already had to try and cope with five repayments rises on their monthly mortgage payments.

Moreover there is increasing speculation over the chances of a fall in interest rates, with more and more industry experts predicting that the Bank of England will cut the interest rate by the end of this year.

However, the Ernst & Young Item Club stated that one interest rate cut will not be enough to combat the turmoil in the financial markets, adding: "The MPC will need to remain alert and ready to act promptly to offset the impact of tightening lending conditions on the housing market and consumer demand."

Tom Smith
9th October 2007

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