Base Rate Cut to 3%

The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves to 3.0%.


Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries.

In the United Kingdom, output fell sharply in the third quarter. Business surveys and reports by the Bank's regional Agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK's main export markets.

CPI inflation rose to 5.2% in September. The substantial rise since the beginning of the year largely reflects the impact of higher energy and food prices. But commodity prices have fallen sharply since mid-summer, with oil prices down by more than a half. Inflation should consequently soon drop back sharply, as the contribution from retail energy and food prices declines, notwithstanding the fall in sterling. Pay growth has remained subdued. And measures of inflation expectations have fallen back.

Since the beginning of the year, the Committee has set Bank Rate to balance two risks to the inflation outlook. The downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulled inflation materially below the target. The upside risk was that above-target inflation persisted for a sustained period because of elevated inflation expectations. In recent weeks, the risks to inflation have shifted decisively to the downside. As a consequence, the Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target. At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3.0%.

The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 12 November.

The minutes of the meeting will be published at 9.30am on Wednesday 19 November..





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George Soros | Soros warns global boom is over!

Billionaire investor George Soros has given his gloomiest assessment of the state of the US and world economies.

He told BBC business editor Robert Peston that the "acute phase" of the credit crunch may be over but effects on the real economy are yet to be felt.

He warned the "financial bubble" of the last 25 years could be drawing to an end and the post World War II "super-boom" era could also be over.

He predicted a "more severe and longer" US slowdown than most people expect.

And he said that the UK was worse-placed than America to weather to coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.

Gloomy bankers

Mr Soros said that the current mandate of most of the world's leading central banks - where their main focus was fighting inflation - meant there was limited scope for cutting interest rates to help economies recover.

As for the Bank of the England, he said, "it was like a Greek tragedy", because they "couldn't do a U-turn" until there was a full-blown recession, which would finally take away the price pressures.

The Bank of England is warning of higher inflation and slower growth

It was "inevitable" that they would keep rates too high for the good of the economy, he added.

In part, Mr Soros is echoing the gloomy forecast of the world's central bankers in recent weeks.

The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the "market correction was still on-going".

Mervyn King, the governor of the Bank of England, warned in the Bank's inflation report that UK inflation would rise above its target while the economy would slow sharply.

Moral hazard

Mr Soros believes that central bankers are partly to blame for the credit crunch because of their past behaviour in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem.

In the US Bear Stearns has had to be rescued

He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.

And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy.

These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

Misguided markets

Mr Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies.

Oil prices have risen relentlessly this year

He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidised energy costs mean there is less price-sensitivity.

He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a "bear market rally".

Profiting from the crisis

Mr Soros has credibility partly because he is prepared to invest his own money to back up his convictions.

The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected.

Mr Soros was the man reported to have made $1bn in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism.

Mr Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.


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