The Bank of England has cut interest rates to the lowest level in its 315-year history as it desperately attempts to prevent the UK recession deepening into a slump.
The bank rate has been reduced by 0.5 percentage points to 1.5pc after recent economic data suggested that the UK is in store for a deep recession this year as the house price slide, unemployment rises and spending slows.
– Chancellor set to print more cash as interest rates hit record low (Times)
– No plan to print money – Darling (BBC)
– Bank Of England’s Historic Cut (Forbes)
Economists believe that because the UK is experiencing a significant downturn, with banks unwilling to lend and pass on interest rates cuts in full, the Bank will reduce rates close to zero to try and ease the impact.
“The 50 basis point cut at this juncture was appropriate. However, with survey data continuing to languish at record lows – manufacturing and services surveys in the past few days have confirmed that activity is falling sharply – we see no reason for the Bank to hold back in cutting interest rates to 1pc or below in the coming months,” said Hetal Mehta, senior economist from the Ernst & Young ITEM Club.
The Bank’s Monetary Policy Committee will have examined all the latest data on the economy before reaching its decision, including most recently a Nationwide survey this week which showed house prices fell 15.9pc in 2008.
In a statement accompanying the decision the MPC said that UK business activity fell sharply during the fourth quarter of 2008 and is likely to continue to do so during the first part of this year.
It reiterated that more action was needed to increase lending to businesses and consumers: “The outlook for business and residential investment has deteriorated. And the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector,” it said.
The Bank is now likely to consider other, less conventional attempts to boost the economy, including printing money, known as quantitative easing.
The MPC’s decision to cut interest rates today may also have been influenced by the pound’s modest gains against the euro this week after falling to close to parity at the end of 2008 with a low of €1.02 on December 30. It closed yesterday at €1.11.
The MPC has already admitted that it considered bigger rate cuts than it eventually opted for in November and December, partly over fears that it would trigger a run on the pound.
By Angela Monaghan
Last Updated: 2:25PM GMT 08 Jan 2009
Source: The Telegraph