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07 Feb, 2008

Published: 14:34 Thursday 07 February 2008
By: Matthew Goodburn, Investment Correspondent

Royal London Asset Management economist Ian Kernohan warned that while the quarter per cent cut would reduce the price of credit it would not necessarily improve its availability.

However he welcomed its positive effect on market confidence saying: 'Lower sterling is an important part of the transmission mechanism and rate cuts are good for confidence, that magic ingredient in a market economy.

He added: ' Expect more reductions later in the year.'

Jon Cunliffe, head of interest rate alpha at ABN Amro Asset Management, predicted that the Bank would have to have cut rates to below 4.5% by year end.

He said: 'Looking ahead a combination of weaker housing and significant tightening in lending standards should exacerbate the current slowdown in consumer spending and ensure that we see growth well below trend this year. '

He warned: 'Elsewhere, whilst rising utility prices may put some upwards pressure on consumer price inflation, we feel that the disinflationary forces evident in the retail sector are likely to prevail.'

Against this backdrop, he argued, the bank had 'ample scope' to cut rates to below 4.5% by year end.

Standard Life global strategist Frances Hudson said the Bank's quarter point cut and quarter point cut had been universally expected.

She said : 'It was more or less taken as read that there would be a 0.25% cut and that the ECB would leave rates unchanged. The state of the money markets now shows that Libor rates have narrowed and there is less distress in that area.'

While the Bank of England cut interest rates by 0.25%, its European Central Bank counterpart left rates unchanged at 4%.

Most commentators believe both decisions were priced in by markets.

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