The Bank of England’s Monetary Policy Committee considered a more aggressive interest rate cut in December, but settled unanimously on the 100 basis point reduction, the MPC Meeting Minutes revealed today.

MPC officials noted that “the significant probability of undershooting the inflation target in the medium term,” warranted a cut of at least 1.00%. Interestingly, the Committee also noted that “the scale of the downside risk to inflation,” might justify a “larger cut”.

The commentary from December 03-04 points towards the likelihood of more rate cuts to come from the BOE. This will take the Official Bank Rate below 2.00 percent for the first time since The Bank was founded more than 300 years ago.

Indeed, the risks to the economy were deemed substantial enough that a cut of less than 1.00% was not even considered. The Committee agreed, “that a significant margin of spare capacity would open up over the next couple of years”.

However, the unanimous 9-0 decision was taken on a 1.00 percent easing of monetary policy to ensure the stability of financial markets. At the time The Bank felt that a 100 basis point cut was “priced in” to the market and a more aggressive cut “could cause an excessive fall in the exchange rate… and undermine confidence in the economy more widely”.

The UK’s Official Bank Rate currently stands at 2.00% ahead of the Bank of England’s next Monetary Policy Committee meeting on Jan 7-8 2009.

The Bank of England’s Monetary Policy Committee voted unanimously to cut rates by one and a half percent in November, the BOE MPC Meeting Minutes revealed today.

The 9-stong committee also considered a larger 2.00% cut thanks to a deteriorating economic outlook and the prospect of falling inflation. The Bank’s Inflation Report revealed that inflation would likely fall to “well below” its 2.0% target in 2009 and the Committee would have been privy to this information prior to its release.

However, the prospect of a 2.00% cut was rejected in favour of a more measured approach to the easing of monetary policy. The MPC believes that consumer confidence will be supported if the bank eases rates gradually as and when more signs of economic weakness become apparent. The Bank also believed that drastic cuts could weaken the GBP to a level that might create upward inflationary pressure.

The decision to measure interest rate cuts was key as the MPC wanted the opportunity to explain its position in the November Inflation Report. It seems that the Bank is well aware of the importance of keeping the British consumer informed. If the UK economy is to recover, or at least minimise recession, consumer confidence and spending will be key.

The BOE Interest Rate Statement is due on Thursday October 9th at 12:00 UK time. Following the shock 1.00% rate cut from the Reserve Bank of Australia, the BOE’s release will be more highly anticipated than usual.

Economists have been expecting a cut of 0.25% from the BOE which would reduce rates to 4.75%. However, economists had only been expecting a half-point cut from the RBA. Speculation is growing over whether we will see a coordinated, significant cut from the BOE this week and the Fed on October 29th.

This video takes a look at the short-term areas of support and resistance that may cap price action in the GBP/USD until the interest rate statement on Thursday.

Watch a higher resolution version of our UK Interest Rate Preview here.

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