Pound dives on prospect of steep UK rate cut

Sterling tumbled to a new low against the euro today after it emerged that the Bank of England discussed making a steeper interest rate cut while analysts suggested the UK will follow the US Federal Reserve by making a sharp reduction to borrowing costs.

Minutes from December's meeting between the Bank of England's Monetary Policy Committee (MPC) revealed that members considered a larger rate cut than the eventual 1 per cent but held off for fear of causing an excessive fall in the exchange rate.

However, the pound edged further towards parity with the single currency at €1.08 today as details of the minutes emerged, giving weight to expectations that the Bank may follow the US Fed's surprise steep cut last night, to a record low of between 0 per cent and 0.25 per cent.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The minutes of the December meeting of the Monetary Policy Committee (MPC) suggest that another hefty interest rate cut in January is very much on the cards."

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In December, the MPC voted unanimously for a one point cut to 2 per cent.

Mr Archer said that, as the downturn deepens with the UK economy set to officially fall into recession and a retreat in inflationary pressures, the Bank could cut the interest rate by 0.75 per cent to 1.25 per cent in January.

But he added: "We believe that the Bank of England may moderate the pace at which it is cutting interest rates as they near zero and the previous large cuts take time to feed through.

"Even so, another 100 basis point reduction is certainly possible in January if the data show further serious deterioration.

"Further out, we expect interest rates to fall to a low of 0.50 per cent in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero."

source: the london times