December interest rate decision 'on a knife edge'

Tomorrow's decision on the future of interest rates is set to be one of the tightest calls over the last ten years of the Bank of England's independence.

The Bank of England's monetary policy committee (MPC) is coming under increasing pressure to cut interest rates as the property market and economy show signs of slowing under the weight of the last barrage of interest rate rises and the credit crunch – meaning borrowing is now more costly and more difficult.

However, inflation – the MPC's primary target – is now above the Treasury's target and rising oil and food prices are set to push it higher.

The MPC's Inflation Report points to interest rates being cut early next year as inflation rise and then falls in the medium-term.

Another factor to include is the fact over its ten-year independence the MPC has only once moved rates in December – unwilling to rock consumers and distort the market in the run-up to Christmas.

Howard Archer at Global Insight said: "Thursday's interest rate decision by the Bank of England remains one of the tightest calls ever as the MPC juggles with a slowing economy and current rising inflationary pressures.

"We now believe [inflationary] concerns will be outweighed by increased worries within the MPC that the UK economy is headed for a sharp downturn. Consequently, we expect a majority of MPC members to come to the conclusion on Thursday that a 25 basis point interest rate cut to 5.50 per cent is justified."

He went on to predict two further cuts in 2008 - taking rates down to five per cent.

Meanwhile the Centre for Economics and Business Research (CEBR) is expecting a hold in rates – but with a 20 per cent chance of a cut."

Ross Walker, economist for the Royal Bank of Scotland (RBS), was clear over the December decision, saying: "December '07 [will be] no change, 5.75 per cent."

HSBC and Lloyds TSB are also both expecting a rate freeze.

Looking forward across 2008, the consensus is rates will fall.

Mr Walker at RBS wrote: "February '08 = -25bp to 5.5 per cent. May '08 = -25bp to 5.25 per cent, then on hold at 5.25 per cent to end 2008."

HSBC and CEBR meanwhile both expect further cuts.

A CEBR spokesperson said: "A 90 per cent chance of a cut by the first quarter of 2008."

"By the end of the second quarter 2008, rates will be down to 5.25 per cent, down to five per cent in the third quarter of 2008, and to remain at five per cent at the end of the fourth quarter of 2008 and the first quarter of 2009."

HSBC went further seeing rates down to 4.75 per cent. "We . . . have cuts again in quarter two, quarter three and quarter four, and you get 4.75 by the end of the year."

Despite all the certainty rates are going down it is worth remembering before the summer analysts were pointing to the cost of borrowing reaching six per cent in the UK – before the credit crunch came and Northern Rock saw queues outside its doors.

Tomorrow's decision will be eagerly watched by the markets and consumers alike. If there is no move, pressure will mount further for a new year cut.