Is The Bank Of England Ready For The Biggest Gamble Of All?
As news broke today that the US Federal Bank had reduced US interest rates by three quarters of one percent, the pressure has now been placed fairly and squarely at the door of the Bank of England to follow suit. But what will happen next?
The US cut was a direct action to try and curb the worldwide credit crunch which has seen the cost of finance increase around the world. This was reflected in the announcement that while UK rates were recently reduced by quarter of one percent, many mortgage providers where actually forced into increasing their rates to coincide with the massive increase in the cost of finance. Not since the early 1980s when the US was in the grip of recession have we seen such a major reduction in rates, so surely the Bank of England will need to follow?
Any major reduction in rates by the Bank of England is a major gamble on two levels, first there is the chance that it might send out panic signals to the wider market, something which could heap further pressure on the UK economy. There is also the possibility that inflation could run rampant again if rates were slashed too far and consumers took advantage of the cheap money which would be on offer. So does the UK always follow the US lead?
Unlike many partners of the US, the UK has always gone about their own strategy with the Bank of England having much experience of similar situations in the past. This is an experience which has been passed down the line to the major interest rate decision makers at the Bank. However, it seems inevitable that UK rates will fall at least by quarter of one percent at the next meeting in two weeks, but hopes of a major slashing of the rate may be a little wide of the mark. Time will tell…..