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Bank Of England 'Considers Interest Rate Cut'

(c) Sky News 2012

At midday the Bank of England will announce its monthly decision on the interest rate with the small possibility that the Monetary Policy Committee might vote to reduce it further.

The base rate of interest has been at an historical low of 0.5% since March 2009, but hints from the IMF (Berlin: MXG1.BE - news) and recent poor GDP figures might persuade the Bank to lower the rate to 0.25%.

Watch out for developments on Quantitative Easing as well. The latest round ends in November (Stuttgart: A0Z24E - news) but some analysts are predicting an extension of £50m.

Figures for June showed that new mortgage approvals fell to their lowest levels in 18 months and total lending (which includes credit card borrowing) saw its smallest rise in two years - £0.3bn.

GDP for the second quarter of 2012 showed that the economy shrank by -0.7% in three months, further confirming the double dip recession that the UK finds itself in.

The Government and the Bank of England are looking for any way to stimulate the economy and encourage growth.

A new 'Funding for Lending' scheme formally got under way on Wednesday in the hope that banks would increase their lending to small and medium-sized businesses.

The scheme has superseded the previous 'credit easing' initiative, both because it contains a bigger pot of available money - £80m compared to £20m, but also because banks no longer have to pass on a 1% reduction in interest rates to the businesses they lend to, thereby making it a more attractive financial proposition.

It is hoped the banks will be persuaded to take loans from the Government because they can be secured at cheap rates, but those rates will only remain as long as the respective banks pass on the loans to those who need it.

The rationale behind a cut in the interest rate would be the hope that it persuades people to take out mortgages, however it could equally have the opposite effect if savers decide to put their money elsewhere in the hope of better returns.

In their July meeting, the Bank of England's Monetary Policy Committee indicated they were not ready to reduce interest rates just yet.

The new Funding for Lending scheme might persuade them to stick to that thinking but most people agree that some further stimulus will be necessary, if not this month, then soon.