UK Cuts Interest Rates to 1.5%


The Bank of England cut interest rates by half a percentage point on Thursday to the lowest level in its 315-year history.

The decision, which comes at the end of the monetary policy committee’s two-day meeting, was in line with City expectations and leaves the base rate at 1.5 per cent.

However, some market participants believe that economic conditions are now so strained that an even larger cut would have been warranted.

The Bank also suggested that the dramatic series of rate cuts in the last three month of 2008 were having a limited impact and that the monetary authorities may have to use other measures to encourage lending to business and consumers.

The statement also said recent falls in sterling may help exporters to limit the impact of the global slowdown.

Earlier this week, the purchasing managers’ index of activity in the services sector showed employers cutting jobs at the fastest rate in the survey’s history, along with a collapse in new orders.

The survey followed a host of other indicators since the MPC’s last meeting on December 4 that showed an economy that appears to be contracting at an even faster rate than earlier in the autumn.

With credit conditions tightening for households and businesses, aggregate demand for goods and services has slumped, while prospects for unemployment are rising.

Economists said the MPC may have decided against a larger rate cut because sterling has fallen sharply – down 8 per cent – since its last meeting in December. Minutes of that meeting showed that some members were concerned about the impact that larger than expected rate cuts could have on market sentiment.

Some economists also believe the MPC may wish to assess the overall impact that recent rate cuts and fiscal stimulus have had before making any more dramatic cuts in rates.


TradingEconomics.com, Financial Times
1/8/2009 5:30:17 AM