Base rate cuts need time to take effect
A policymaker from the Bank of England has said that the recent rate cuts are going to take some time to take effect and feed through to the economy. Andrew Sentance reckons that negative performance indicators in the economy will continue into next year despite the recent drastic rate cuts, as these will need time to actually filter through and will not make any immediate difference to the economy.
He said that it would probably be towards the middle of next year before any of the effects of the recent drastic rates cuts of 0.5% in October followed by 1.5% in November would be felt. He said: “We know that it takes time for interest rate reductions to affect the economy. In the short term I’m afraid we will continue to see negative indicators from the real economy. It’s more towards the middle of next year that we will begin to see the impact of some of the steps we have taken in recent months.”
The base rate is now at its lowest level in over half a century, having been cut to just 3% in November following the 1.5% interest rate cut. A number of officials have predicted that the rate will fall further quite quickly, and that next year it will fall to 2% or below. The base rate has never fallen below 2% since records began in 1694.
Sentance indicated that there could be room for more rate cuts because of falling inflation. He said: “We’ll have another meeting next month where we will be considering the level of interest rates — whether we need to go further in terms of interest rate cuts.”
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