Pressure mounts on Bank of England to boost economy with base rate cut

THE Bank of England will be pressured to cut interest rates this week as market observers fear the $700bn bailout package in the US will only provide a short-term boost to world economies.

In the aftermath of the rescue agreement that was finally reached on Friday, there were clear indications of only a lukewarm response from investors.

The S&P 500 index in the US closed at its lowest level in almost four years, at 1,099.23.

And despite expectations that the US agreement would be reached, the FTSE 100 closed at 4,980.3 on Friday, down 2.1% over the week.

Adam Seagrove, of CMC Markets, said: "The bailout will provide short-term relief, but markets will start to look at the wider economic picture." David Jones, chief market strategist at IG Index, said the worry is that any bounce-back by the markets will be used to offload shares at better prices.

To encourage longer-term recovery, calls have mounted for the Bank of England to cut rates by as much 0.5% on Thursday, despite inflation continuing to rise.

Andrew Mickel, director of Scottish housebuilder Mactaggart & Mickel, said: "A 0.5% cut is essential to try to help stimulate the market.

"The MPC must not sit and fiddle and respond to events late – it must show some leadership for once."

The base rate was cut by 0.25% in April, but there has not been a 0.5% cut since November 2001, in the wake of the 9/11 disaster.

Seagrove said that a rate reduction is overdue and it should amount to 0.5% to have a real impact on the economy.

Dr Howard Archer, chief European and UK economist at Global Insight, said evidence that the economic downturn is deepening will push the Bank of England into cutting interest rates on Thursday despite rising inflation.

He said: "We expect interest rates to be cut from 5% to 4.75%, but there is a very real possibility that the Bank of England could enact a 50 basis point cut to 4.5% given very tight credit conditions."

Archer said there are signs underlying inflationary pressures are starting to ease, adding that a recent sharp fall in oil and commodity prices should help to reduce companies' costs and ease pressure to increase prices. He expects interest rates to come down to 3.25% in 2009, reflecting his prediction that GDP will contract by 0.3% next year.