BANK of England rate setters are expected to slash the cost of borrowing by up to 1% this week in a dramatic attempt to stave off a deep recession.
Economists have forecast a reduction of around 0.5% , but many believe the worsening economic outlook could see rates slashed by a full percentage point – the biggest reduction since the Bank’s Monetary Policy Committee (MPC) was formed 11 years ago.
Such a record-breaking decrease would take rates down to 3.5%, which would be the lowest level for five years.
However, the move may not offer struggling homeowners or business borrowers much relief as lenders are thought to be unlikely to pass on the full cut. More than half of mortgage lenders failed to pass on the last reduction in the Bank base rate, by 0.5% to 4.5% last month.
This was because they faced stubbornly high interbank lending costs.
Key money market rates have begun to come down in recent days as the Government and Bank of England efforts to shore up confidence among banks has seen them become willing to lend to each other.
But the three-month interbank lending rate, used by banks to price mortgages, remained at 5.84% on Friday despite the falls and is expected to prevent many banks from trimming rates for borrowers.
The Bank begins its two-day meeting on Wednesday to discuss the cost of borrowing amid a looming recession. The US last week trimmed its benchmark borrowing rate by 0.5% to 1% in a round of global rate cuts.
China, Norway and Japan were among the other countries to also make the move.
Howard Archer, chief economist at Global Insight, said while the UK’s central bank may opt to cut rates by a half point both this month and next, there was a growing case for a full 1% cut.
“Given the very serious and ever growing danger that the economy will suffer an extended, deep recession, we believed that there is a compelling case for the Bank of England to ’get on with the job’ and deliver a full one percentage point cut to 3.5%,” he said.