Sir Alan Budd
Former chief economic adviser to the Treasury and founding member of the
Monetary Policy Committee
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I vote for a cut of 100 basis points. Since the news on the UK economy is
persistently worse than expected (with the possible exception of retail
sales) and since the news from the rest of the world is even worse, a
further significant cut is justified. The lower exchange rate and the
pre-Budget package will help but are not enough to prevent a serious (and
unnecessary) recession. There may be further to go on interest rates but a
cut of 100 basis points is needed now.
Bronwyn Curtis
Chair of the Society of Business Economists
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The inflation profile outlined at the November Inflation Report risks
embedding deflation into expectations and this is enough by itself to
justify a 1 per cent cut in the Bank rate. Consumer prices will be negative
for several months during 2009 and are forecast to be 1 per cent and falling
at the two-year horizon.
There has also been little respite from bad economic news despite the actions
taken last month and the (further) 5 per cent fall in sterling. Confidence
continues to deteriorate and the forward-looking purchasing managers'
indices indicate that the economic contraction is intensifying. More
alarming are the prices components of the PMI, which were falling, even
before the cut in VAT was announced.
The interbank market is not working properly either even though LIbor is
lower. It is the quantity of credit that is hurting the real economy, not
the price. The securitisation markets are still shut for funding for UK
banks and credit is being rationed.
The dire state of the UK economy is not being helped by the downward revisions
to global growth and the lack of improvement in equity and credit markets.
Geoffrey Dicks
Chief UK economist at Royal Bank of Scotland
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The Quarterly Inflation Report revealed that, even after November 's 150 basis
point cut, the MPC had unfinished business. This week, they should continue,
though not complete, the programme. As in November, the decision is tactical
— how much this week; how much to save up against future bad news? The
correct approach is to front load the cuts but to save something for the
coming months. To do less than 100 basis points is to risk disappointing the
markets; to do more may still be necessary but it can be saved up for 2009.
Charles Goodhart
Emeritus professor of banking and finance at the London School of Economics
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We are sailing in unchartered waters. All banks and other investors are trying
to hoard liquidity. A response to that is to make liquid deposits so cheap
that there is an incentive to use the funds more productively.
The danger remains getting ahead of other monetary authorities so far that
sterling might get seriously attacked. But the exchange rate has recently
stabilised, and the Fed (and the ECB?) are in strongly expansionary mode.
Cut by another 1 per cent.
Anatole Kaletsky
Editor at Large and chief economics commentator, The Times
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Rupert Pennant-Rea
HOLD AT 3%
Former Deputy Governor of the Bank of England, chairman of Henderson Group,
the fund manager
What happens to the Bank of England’s base rate is a sideshow in the conundrum
of how to ease the credit crunch. The banks are the heart of the problem —
they are simply not performing their vital role as lenders to creditworthy
customers — but other parts of the financial system (commercial paper, bond
and equity issues, credit insurance, etc) are also clogged, and have been
for months.
The first “government rescue” of the system — recapitalising the banks,
widening the range of assets that central banks buy — is still not all in
place and will anyway do only half the job. The next stage will be harder,
and thank heavens some policymakers are starting to describe what might be
required.
Meanwhile, the MPC has to meet and contribute its ha’p’orth. Its decision to
cut rates by 1½ points last month did little or nothing to improve financial
conditions because it’s hard to stimulate a corpse. But such a large cut did
exhaust the MPC’s ability to surprise, which may prove to be a serious
lacuna next year.
For now, I’d prefer to see the MPC pause and preserve its firepower for when
the financial system is in some sort of working order and can actually
deliver the benefits of cheaper money. My vote this month: no change.
Sir Steve Robson
Former Second Permanent Secretary to the Treasury
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The Bank has been boxed in by the Government's extremely worrying fiscal
position. The Government forecasts that its own borrowing will rise to 8 per
cent of GDP next year and that, on the Treasury's own figures, the bulk of
this is structural, not cyclical. This is bad enough. The absence of any
credible path back to fiscal stability is even worse. All we are offered, on
the basis of some highly optimistic assumptions on GDP growth and public
sector efficiency, is the possibility of getting to balance on the
Government's current spending by 2015-16. This internal imbalance is
combined with the expectation of a continuing external deficit on the
current account of around 3 per cent of GDP.
This all serves to make both sterling and the Government's own funding
extremely fragile. While some depreciation of sterling is a necessary part
of rebalancing the economy, an inflation inducing rout is not. The Bank
needs to demonstrate to the markets that it is sensitive to this fragility
and so proceed with caution.
Sushil Wadhwani
Former external member of the MPC
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I would vote to cut the Bank rate by 150 basis points. The severity of the
economic situation is such that extreme measures are required. Many
indicators, such as the manufacturing and services PMI indices are at record
lows, and previous policy measures have been insufficient. In particular
with the transmission mechanism for monetary policy now semi-broken, large
cuts are needed to have significant impact (one reason cuts should have been
made earlier more pre-emptively).
The Bank of England recognised the need for further cuts in rates in the
Inflation Report, with the forecast for inflation below target at the
two-year horizon. Since then, developments in the UK and abroad have seen
conditions deteriorate further. Activity indicators have fallen even faster
than expectations and equity markets are down again, more than offsetting
the impact of policy measures, such as the UK fiscal loosening in the
Pre-Budget Report, and the support for the money markets and banks. We need
to avoid a Japanese-style deflation, which could result in a prolonged
recession and radical action is required.
Martin Weale
Director, National Institute of Economic and Social Research
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I am voting for a 1 per cent cut this time. It is likely to have more impact
than sacrificing a goat but it is difficult to have any real conviction that
it will do much good. It is widely recognised that the underlying problem is
a lack of credit and it is quite probable that appreciably more money will
need to be put into the banks before this problem is resolved.
