Bank Of England Urged To Cut Interest Rate

by Carla Johnson, Investors Offshore.com, London

01 October 2007

Ernst & Young's ITEM Club has warned that a so-called credit crunch in the UK market could impact the country's economic growth.

The ITEM Club has reportedly proposed an interest rate cut in order to stave off a sharp downturn, but warned, according to the Times Online, that "one rate cut is unlikely by itself to be sufficient to prevent a significant slowdown in growth next year to well below trend”.

A recent study conducted by the ITEM Club examining the likely impact of a credit crunch explained that:

"Financial markets have been in turmoil over the summer as default risk aversion has spilled over from the US subprime market. The basic problem was that high risk mortgages had been bundled up with corporate debt in structured debt products, causing much wider contamination."

It continued:

"Default risk aversion has made investors very wary. It has already collapsed the demand for commercial paper (CP) and other debt used to finance hedge funds and special investment vehicles that were investing in structured debt products."

The ITEM Club also warned that, in addition to a general slowdown, growth in the financial sector is also likely to slow.

It observed that:

"This has grown rapidly in recent years, particularly in the UK. A halving of the rate of growth of this sector would take 0.4% off UK growth. Additional knock-on-effects in related activities, such as the legal and business services sectors, would also be likely."

"Negative multiplier effects from reduced employment and lower bonus payments would be expected – the latter could have important ripple effects on the UK residential housing market."

Despite similar recent warnings from organisations such as the OECD (Organisation for Economic Cooperation and Development) that a rate cut is necessary to boost the UK economy, analysts are predicting that the Bank of England's Monetary Policy Committee will leave interest rates unchanged when it meets later this week.

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