The latest minutes from the Bank of England’s Monetary Policy Committee (MPC) have revealed committee members considered an even more sizeable cut than the reduction of 100 basis points that was eventually passed unanimously.

According to the minutes, members forecast that given the significant probability of undershooting the inflation target in the medium term, a cut of at least 100 basis points was needed. Members eventually opted against a larger cut as the financial markets had already priced for a cut of 100 basis points, and anything larger may cause an excessive fall in the exchange rate and undermine confidence in the economy.

The minutes state: “A cut of 100 basis points would mean that the level of Bank Rate would have been reduced from 5% to 2% in just eight weeks; given the uncertainty inherent in the transmission mechanism, it was difficult to be certain that rates needed to be cut by more or faster than that.”

However, the minutes are likely to reinforce the expectation for rates to be cut to at least 1% in the early months of 2009.

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