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Bank may reveal deposit rate cut talk

Source: Reuters - Wed 23rd Sep 2009

Investors hope to find out on Wednesday if the Bank of England is seriously considering greasing the wheels of its quantitative easing effort by cutting the interest rate it pays on commercial banks' deposits.

Minutes to the BoE's September rate meeting could reveal a discussion about cutting this remuneration rate, alongside details of the decision to hold interest rates at a record low of 0.5 percent and make no change to the 175 billion pound asset purchase programme.

Following fairly strong hints by BoE Governor Mervyn King last week, any mention of a possible cut to the remuneration rate - which also stands at 0.5 percent - would send a strong signal to markets that this could come as soon as next month.

"That's definitely one thing to be looking for" said Alan Clarke, an economist at BNP Paribas. "They should do it, I think they will do it, and I think October is the time to do that."

"The other one is the possibility of further QE."

If there is no discussion of a cut to the remuneration rate, that would probably mean it is off the cards for the foreseeable future, putting the focus back on any suggestion of a further QE expansion - something King was keen on last month.

While news on the economy has been a bit more encouraging in recent weeks, there is still widespread concern that banks are not yet lending enough to businesses and households - putting a sustained recovery at risk.

RATE CUT

Reducing the remuneration rate would not represent a landmark shift in policy but the central bank would hope it might help spread the effects of quantitative easing quicker.

"This does not necessarily have to involve banks lending more" said Allan Monks, an economist at JP Morgan. "The intention is that lower remuneration can influence the churning of existing reserves - as banks purchase assets, thus pushing up prices and boosting money growth."

"While this makes sense in theory, it is far from clear that reducing the remuneration on bank reserves would make a material difference to banks' portfolio choices - the effective remuneration rate is already very low."

Still, a move of this kind would send a signal to markets that the BoE is still eager to act to boost lending into the economy to help foster growth.

"It gets rid of this safe-haven play" said Clarke. "It may augment the QE programme so you get a bit more bang for your buck."

It could also allow King to duck questions about his credibility if divisions persist on the MPC over the amount of quantitative easing needed to get the economy back on track.

King was in a minority of three MPC members who wanted to expand QE by more then the 50 billion pounds agreed in August.

"There is a long way to go before the level of output gets back to where it was" he told lawmakers last week.

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