MPC to discuss further rates cut

Bank of England policymakers will debate whether to slash interest rates beyond current historic lows when they meet this week in a drastic move to boost the economy.

The Bank's Monetary Policy Committee (MPC) lifted levels of emergency support by £50 billion to £375 billion at its July meeting, while holding its base rate at 0.5%. But the outlook has darkened since the nine-strong panel last convened after figures revealed a larger-than-expected slump in output in the second quarter of the year.

The Committee, chaired by Bank Governor Sir Mervyn King, considered cutting rates below current levels at the meeting in a move that once seemed completely improbable.

However, most economists believe that while the action will be discussed again this week, the MPC will continue to favour quantitative easing as its economic weapon of choice.

Alan Clarke, UK and eurozone economist at Scotiabank, said: "The poor second quarter GDP data make it hard for the Bank of England not to loosen monetary policy further. However, we judge that a further reduction in bank rate could backfire and hold back the creation of new mortgages. Hence we suspect that the further policy ease will be in the form of more QE, not a cut in bank rate."

The economy shrank by 0.7% in the second quarter, meaning the UK is now mired in the longest double-dip recession since quarterly records began in 1955 - and possibly since the Second World War.

A reduced rate would be the lowest in the Bank's 318-year history, with a cut to 0.25% saving a borrower with an average lifetime tracker rate on a £200,000 mortgage £328.56 a year, according to comparison site Moneyfacts.

But lower borrowing costs would deliver yet another blow to Britain's savers, who have lost out since rates hit their current historic low in March 2009.

The Bank's main concern over a rate cut beyond 0.5% is the impact it could have on some banks' and building societies' ability to lend.

Lenders have assets, mainly mortgages, with interest payments contractually linked to the Bank's rate and a reduction below 0.5% might squeeze some lenders' interest margins to the point at which they become less able to offer new loans to customers.