Bank of England cuts interest rates

November 6th, 2008 - 9:42 pm ICT by IANS  

London, Nov 6 (DPA) The Bank of England Thursday slashed interest rates by a hefty one-and-a-half percentage points to 3 percent in its most dramatic effort yet to soften the impact of a looming recession.The shock cut decided by the bank’s Monetary Policy Committee (MCP) followed calls from business leaders for a significant reduction in the key lending rate, but the maximum cut expected had been one percentage point.

Analysts said the decision underlined that as inflationary fears were receding, the risk of deflation was now emerging as a key threat.

The central bank said in a statement that Britain had seen a “substantial downward shift in the prospects for inflation” in the past two months and commodity prices had fallen sharply, while there had been “a “very marked deterioration in the outlook for economic activity at home and abroad.”

Business leaders and trade unions immediately welcomed the rate cut.

Richard Lambert, director-general of the Confederation of British Industry (CBI) called it a “bold and welcome move”.

Adam Lent, spokesman for Britain’s Trades Union Congress (TUC), said the cut was “precisely in line” with expectations. “It shows the bank now understands that the problem is recession and not inflation.”

It was the first time the bank reduced rates by more than half a percentage point since it gained independence from the government in 1997, and the biggest single cut ever, bringing interest rates down to 1955 levels.

Rates were last cut by 0.5 percentage points to 4.5 percent on Oct 8 in a concerted emergency move with other central banks around the world.

The Bank of England’s latest move came after a series of figures released this week provided further evidence that the British economy is sliding towards recession.

Figures published Thursday showed that house prices fell by another 2.2 percent in October, putting the year-on-year drop in property prices at 13.7 percent.

Activity in the service sector, the backbone of the British economy, also shrank in October for the sixth months in a row.

Manufacturing output fell by 0.8 percent in September, making it 2.3 percent lower than a year earlier in the sharpest decline since May, 2003.

Figures released Thursday showed that new car sales fell by 23 percent in October, its biggest monthly year-on-year fall for more than 17 years.

Car industry leaders and trade unionists said the figures demonstrated that the recession was taking hold and urged increased investment accompanied by a significant interest rate cut.

Ahead of Thursday’s interest rate decision, David Smith, the chief executive of Jaguar Land Rover, called for a “courageous and decisive change in interest rate policy” in Britain and by the European Central Bank.

However, there was immediate pressure on the central bank Thursday to go further.

Graeme Leach, chief economist at the Institute of Directors, while welcoming the cut, said: “The reduction shows that the MCP think inflation is yesterday’s story and deflation is the risk for tomorrow.

We think interest rates could touch record lows of 2 percent or less by next time next year. The sooner we get interest rates down, the less is the risk of a long and deep recession.”

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