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Bank set to cut interest rates to new record low

  The Bank of England looks set to cut record low interest rates by at least another 50 basis points on Thursday in order to pull the economy out of recession by getting consumers and companies spending again.

Most analysts polled by Reuters last week said the central bank would cut rates by 50 basis points to 1%. Some predicted an even bigger cut and said it won’t be long before the Bank starts raising the money supply to boost demand. Interest rates have been falling sharply globally as an 18-month-old credit crunch has brought the world economy to its knees and put millions out of work.

The US Federal Reserve has already cut interest rates to a record low of between 0 and 0.25%. In Japan, rates stand at just 0.1%. In the euro zone, they are at 2% and expected to fall to a new record low next month. The International Monetary Fund has predicted the economy could be the worst-hit in the industrialized world, shrinking by 2.8% in 2009.

"The economy is in deep recession and ITEM believes that interest rates should fall further -- possibly to zero," said Andy Goodwin, senior economic adviser to the Ernst and Young ITEM Club.

POLICY SPLIT?

Having already cut interest rates by a total of 3.5 percentage points since October, the Bank’s Monetary Policy Committee is probably grappling over just how much more stimulus the economy needs. MPC member David Blanchflower said last week that aggressive monetary easing was needed but some of his more economic model-orientated colleagues like Deputy Governor Charles Bean may be concerned that the economy is already getting a big boost from past rate cuts, the fall in sterling and fiscal policy.

Still, the Bank will probably find it hard to forecast inflation at anything much over 1% in two years when it presents its new quarterly forecasts next week. It is required to keep inflation at 2%. “You might say there is a lot of stimulus but you have got so much spare capacity,” said Philip Shaw, chief economist at Investec.

Many analysts say the Bank will soon have no choice but engage in so-called quantitative easing -- where the central bank starts meddling with the supply of money rather than its price.

The Bank already got the initial go-ahead from the Treasury to do this in theory but it would still require further discussion between the two institutions if the Bank chose to use the powers. The basic idea, however, would be for the Bank to buy assets -- whether gilts or some such -- and raise the amount of money in the economy which would then support demand. (Reuters)