Bank reduces rates

Majority of economists began to favour an April reduction after reports emerged of a slump in the service sector, painting a much gloomier economic picture.

A minority believed the Monetary Policy Committee (MPC) would hold rates until May in an attempt to mitigate against rising inflation, however mounting pressure looks to have forced the Bank’s hand.

Barry Naisbitt, chief economist at Abbey said: "This decision was hinted at back in the February Inflation Report, although its timing was uncertain.

"The MPC has taken a forward-looking view that slower growth is likely to reduce medium-term inflationary pressures and has been able to cut rates because of its focus on medium-term inflation, but is well aware that energy and food price rises are likely to raise inflation in the near term."

Adrian Coles, director-general of the BSA cautioned: “The MPC’s rate decision may not be reflected by changes to the money market rates. Therefore the quarter point reduction will not necessarily be reflected in the fixed rates on offer straight away."

Brian Murphy, head of lending at Mortgage Advice Bureau added: “With the CBI and now the IMF forecasting economic growth below that of the Chancellor’s original calculations, this worrying prediction meant it was imperative for the MPC to act in order to avoid the economy stagnating.

“In addition, an injection of liquidity into the market is urgently needed to allow businesses to borrow for investment purposes, to encourage a higher level of consumer spending and instil some much needed confidence particularly within the housing market. Interest rates however do need to be controlled to keep a lid on inflation which is running ahead of the Government’s own target level of 2 per cent."

Murphy concluded: “I do not think that we have seen the last of the rate cuts for this year and would expect a further base rate decrease, but unless there is a real deterioration in the economic outlook we may have to wait until the second half of 2008.”