Another interest rate cut later today from the Bank of England is looking “nailed on” City economists said today after the latest signs of weakening business confidence.
The Bank’s Monetary Policy Committee (MPC) will reveal at noon whether it voted for a second quarter point cut following its first reduction in the cost of borrowing in four years in August.
The Bank’s benchmark rate now stands at 5% and is expected to be lowered to 4.75%, the lowest since June last year.
A rate cut would immediately reduce the mortgage bills for millions of home owners on variable rate deals such as trackers although the majority on fixed rates would see no change until they come to refinance.
Before the Budget a cut was seen as a near certainty - with a second move in December - but the bigger than expected scale of Government spending and borrowing revealed in last week’s Budget prompted forecasters and investors to shift their projections.
However, a slowdown in business and consumer confidence in recent weeks suggests that uncertainty ahead of the budget caused firms to put spending and investment on hold.
Economics Expert, Professor Andrew Angus at Cranfield School of Management said: “Although the economy has performed better than expected this year, it remains sluggish. This was not helped by anticipation around the Budget causing a so-called ‘vibecession’, where companies and consumers delayed spending as they waited to see what the Chancellor had to say. With an interest rate cut to 4.75% pretty much a certainty today, the government will be hoping to see the UK’s economic vibes improve with a return of confidence.
“However, the hopes for a second rate cut before the end of the year are diminishing as the effects of last week’s budget take hold. The Chancellor has announced large-scale investments, which could drive prices higher. Combined with rising fuel costs during the colder months, these factors are likely to put upward pressure on inflation. Consequently, the Monetary Policy Committee is expected to delay another interest rate cut.
“Since interest rates are a blunt tool for economic control, prolonged high rates can have negative effects, making it harder to stimulate the economy when needed. The Bank of England must strive for the elusive Goldilocks scenario of finding just the right balance.”
Paul Heywood, chief data & analytics officer at credit agency Equifax UK, said: “With inflation below target, a further base rate cut remains the most likely scenario, but consumer affordability pressures won’t disappear overnight and could yet persist for longer.
“The volume of mortgage originations on loan terms of more than 35 years remains over twice as high as two years ago, as consumers trade off a bigger long-term bill for the short-term relief of smaller monthly repayments.
“That’s before considering the changes to Stamp Duty relief for first-time buyers, or any fresh inflationary impact from government spending plans.”
Thomas Pugh, economist at accountants RSM UK, said: “The question is whether confidence will rebound in November, or whether the big increases in the national minimum wage and National Insurance contributions will have been enough to further depress sentiment.
