Thursday 28th February 2008
The Bank of Englands wait-and-see approach to setting the base rate could result in a long-term trend towards lower rates, an analyst claims.
Paul Dales, UK economist with Capital Economics, argues that more immediate action could see the nations finances brought under control without the need to significantly lower the base rate.
But he observes that the monetary policy committee (MPC) is currently responding more slowly than its American counterpart the US Federal Reserve.
"We think that theyll only continue to cut rates slowly, which obviously means there will be less of a stimulus to the economy," he predicts.
As a result, he states that the base rate "will have to go lower" than might be the case if more drastic short-term action were taken.
The anticipated discrepancy between the minimum which might be reached with a rapid response and that which is likely to materialise if the current trend continues is as much as half of one per cent.
Mr Dales explains that, with affirmative immediate action, a low point of 4.5 per cent might be sufficient to turn the nations finances around.
But the wait-and-see technique currently being employed by the MPC could see this figure fall to four per cent, he estimates.
Despite this, the economist notes that mortgage providers are typically failing to pass reductions in the base rate on to their clients in full.
"There does seem to be a kind of stickiness in that lever of bringing monetary policy to the markets and then the economy," he warns.
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