Capital Economics is predicting further base rate cut in November

A further reduction to the Bank of England base rate looks likely, according to the latest UK Capital Economics update. The economic analyst thinks that there is more than a 50% chance that the Bank of England will lower base rate and make a 0.25% reduction in November - taking official rates to 0.25%. The Monetary Policy Committee (MPC) has been concerned about the potential adverse impact of a cut in bank rate on banks' profits, given that many mortgages are contractually linked to the base rate. 72% of outstanding mortgages are variable, rather than fixed. Capital Economics says that it is possible that the MPC could cut rates even closer to zero, following the examples of the US Fed and Bank of Japan. The US Fed's target rate is zero to 0.25% and Japan is targeting an overnight rate of zero to 0.1%. According to their UK economic update: “We have said for some time that cutting interest rates below 0.5% remains a potential tool in the MPC's arsenal and the MPC now seems to be warming to the idea. “Admittedly, with rates already at just 0.5%, there is still a limit to what good a further cut can do. The Bank of England's econometric model suggests that each 25bps cut boosts GDP by just 0.1%.” July 26, 2012