Bank of England could have reduced rates by 200 bps!

In its previous meeting on 6 Nov 2008, BoE had cut rates by a shocking 150 bps making it the largest rate cut in UK’s monetary policy history and also the largest cut amidst central banks (barring Iceland). The markets had expected 50-100 bps. All eyes weer on the minutes of the meeting,

The minutes have been released and suggest that it could have been a 200 bps rate cut!!

The projections in the Inflation Report implied that a very significant reduction in Bank Rate – possibly in excess of 200 basis points – might be required in order to meet the inflation target in the medium term. However, a number of arguments were discussed for not moving Bank Rate by the full extent implied by those projections.

There were 4 points which led to a 150 bps rate cut:

First, the projections had used the normal convention that they were based on the Government’s most recent published tax and spending plans.

Second, although the banking measures that had been introduced around the world had restored a degree of stability to the banking system, it was unclear how the supply of broad money and credit to the wider economy would respond.

Third, a key concern was the degree of surprise to financial markets. Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive.

Fourth, some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened.

Hence, because of the uncertainty in the economy and need to have some weapons to fight the looming collapse, BOE did not pass a 200 bps rate cut. One can expect similar/steeper rate cuts in the next meeting on 3 & 4 December. It shouldn’t be a surprise.

2 Responses to “Bank of England could have reduced rates by 200 bps!”

  1. UK Govt warns it could nationalise its Banks « Mostly Economics Says:

    […] in a statement at the same meeting (explaining the recent Inflation report and 150 bps rate cut which could have been 200 bps) said bank resuming lending is the biggest […]

  2. What Universities in America are good for politics and economics? | Politics Says:

    […] Bank of Engalnd could have reduced rates by 200 bps! « Mostly … […]

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