BOE May Cut Rate by Most Since 2001, Economists Say

Brian Swint
BLOOMBERG
Friday, October 3, 2008

Oct. 3 (Bloomberg) — Bank of England policy makers may cut the benchmark interest rate next week by the most since 2001 as the British economy hurtles toward a recession, economists say.

Citigroup Inc., BNP Paribas SA, JPMorgan Chase & Co. and Royal London Asset Management today changed their forecasts to predict a half-point reduction from the current 5 percent on Oct. 9. Investec Securities, Bank of America Corp., Deutsche Bank AG and UBS AG this week forecast a quarter-point cut.

“We’ve got a severe financial crisis that has worsened in the past week and clear signs the economy is falling off a cliff,” Michael Saunders, chief western European economist at Citigroup, said in an interview. “The balance of risks has shifted decisively to the downside.”

Services industries from banks to hotels shrank by the most on record in September as the global financial crisis threatened to throw the economy into the first recession since 1991. The Bank of England, which has provided extra funds to the market as banks hoard cash, hasn’t lowered interest rates since April on concern about the fastest inflation in a decade.

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The last time the U.K. central bank lowered the rate by a half-point was in November 2001, in the aftermath of the Sept. 11 terrorist attacks.

The pound fell as much as 0.4 percent today, trading at $1.7565 as of 2 p.m. in London. The currency has fallen 12 percent since the start of July.

Bloomberg Survey

The main U.K. rate will fall to 4.75 percent on Oct. 9, the median of 61 forecasts in a Bloomberg News survey showed today. Four economists predict a half-point cut, 42 forecast a quarter- point reduction and 15 said the rate won’t change.

The nine-member Monetary Policy Committee voted 8-1 to keep the rate unchanged last month, with David Blanchflower supporting a half-point cut. Blanchflower said he’ll argue for a cut again next week, in a newspaper interview published today.

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