City Expects Interest Rate Cut to 5% - and Business Hopes for More in May

The Bank of England is widely expected to cut interest rates again today in response to a growing threat to the economy from the global credit crisis which has pushed up mortgage costs and restricted the availability of funds to households and businesses.

Most City economists expect the Bank to trim another quarter point off interest rates, taking them to 5%, their lowest in over a year.

A "shadow" monetary policy committee at Cazenove yesterday voted 9-0 to cut rates, arguing that threats to growth now outweigh upside risks to inflation, even though it is above its 2% target at 2.5%.

While the Bank's monetary policy committee says it does not target house prices, signs that the housing market is weakening sharply will worry the committee because falls could lead to a big drop in consumer spending.

The MPC cut rates in December and February in an attempt to contain the fallout from the credit crisis, but the actions of mortgage lenders in recent weeks have meant neither households nor firms have benefited.

BoE figures yesterday showed mortgage rates for many borrowers had risen to their highest level for eight years.

David Kern, economic adviser to the British Chambers of Commerce, said: "A cut in interest rates to 5% today is vital and long overdue. However, this alone is no longer enough. We believe a further cut to 4.75% will be urgently needed in May. Falling UK house prices and much lower growth forecasts from the IMF provide evidence that the UK economy is set to slow more sharply than previously expected."

The Halifax reported on Tuesday that the average house price fell 2.5% last month from March, the biggest drop since the last housing market slump in the early 1990s. Some economists think house prices could fall by 20% or more. Consultancy Experian said yesterday that a 20% fall in prices would expose 78,000 households to negative equity.

The MPC voted last month 7-2 to keep rates steady, with deputy governor Sir John Gieve and external member David Blanchflower arguing for an immediate cut. Blanchflower, an academic based in the US, fears that the British economy is going to follow the US into recession and thinks rates should be cut sharply.

There was encouraging news on inflation yesterday. The British Retail Consortium said shop prices rose 1.1% in the year to March, down from 1.3% in February. Within that, food price inflation slowed to 4.1%. BRC's chief Stephen Robertson, said: "With customers' finances under real strain, retailers recognise value is crucial. They've cut many prices and overall annual shop price inflation has fallen back to levels not seen since November."

But oil prices yesterday reached a record high of $111.81 a barrel in US mid-session trading.