Bank signals cut in interest rates

THE Bank of England today signalled a further cut in interest rates.The Bank's latest quarterly inflation report reveals that Consumer Prices Index (CPI) inflation could spike sharply in the second quarter of 2008 if rates were cut as much as markets expect.

THE Bank of England today signalled a further cut in interest rates.

The Bank's latest quarterly inflation report reveals that Consumer Prices Index (CPI) inflation could spike sharply in the second quarter of 2008 if rates were cut as much as markets expect.

Markets have pencilled in rates to be reduced to around 4.5pc by the end of the year, but today's report suggests that such dramatic reductions would see CPI inflation soar to more than 3pc in the near term - which would force Bank Governor Mervyn King to write an open letter of explanation to the Chancellor.

And CPI would remain above target within the two-year projection period, if rates were trimmed aggressively.

But borrowers look set for some relief, with the report predicting that CPI would undershoot target in two years' time if rates were kept at 5.25pc.

The quarterly report underlines the difficult task faced by the Bank in keeping a lid on CPI amid slowing growth and soaring inflation.

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The Bank said the outlook for economic growth falls back "markedly" as the ongoing credit crunch takes hold.

The credit squeeze poses a particular risk to the economy, as conditions have tightened further, it said.

The Bank shaved a quarter point off interest rates last week to 5.25pc as the economic slowdown became more pronounced.

Official figures showed that activity in the manufacturing sector almost ground to a halt last month, while house price data has showed a significant cooling-off in the property market.

The Bank hinted today that GDP growth would fall substantially later this year if rates were not cut further.

But it is clear from today's report that market expectations for rate reductions have been overdone.

Dramatic rate cuts by the US Federal Reserve last month sparked hopes of similar action on this side of the Atlantic.

The sobering outlook for inflation is instead likely to see rates come down more gradually in the UK, according to today's report.