Interest rates should “fall to 4 per cent”

Interest rates should be cut to 4% to ensure that Britain avoids a “shallow recession”.

That is the view of Charles Goodhart, a former member of the Monetary Policy Committee, the group responsible for setting interest rates in the UK.

Professor Goodhart warned that strains in the housing market and the financial system were taking hold and that Britain and the US were facing possible periods of recession. He called on the Bank of England’s Monetary Policy Committee to reduce interest rates from the current level of 5.25%.

The MPC is expected to keep interest rates on hold at their next meeting, although financial experts are predicting a particularly close vote.

Goodhart said: “My fear is that since the UK has been so strongly involved in the housing market and in the financial sector, both of which are at the sharp end of the present financial crisis, it is actually quite likely that we will move into a rather shallow recession.

“I think there is no particular problem in interest rates going down to 4%.”

Alan Clarke, economist at BNP Paribas, also called for action from the Monetary Policy Committee. He said: “The Bank of England has been preaching for ages that early action will avoid it having to do more at a later stage. If it doesn’t move faster, interest rates will end up starting in a three rather than a four, which could risk sparking another housing boom.

“I wouldn’t be surprised if the MPC has an even more divided vote than 8-1.”

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