Bank of England cuts interest rates to 1.5%
Mervyn King, Governor of the Bank of England
THE Bank of England made history today by cutting interest rates by 0.5% to an all-time low of 1.5% to battle a deepening recession.
Rate-setters on its Monetary Policy Committee (MPC) cut borrowing costs below 2% for the first time since the Bank was founded in 1694.
The move came hard on the heels of drastic rate cuts from 5% to 2% since the beginning of October as the UK’s economic plight worsens.
Barry Flynn, Liverpool senior partner at Ernst & Young, said: “A 50 basis point cut in the interest rate 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 1% or below in the coming months.”
The MPC will have weighed up a raft of gloomy economic data including a 15.9% fall in house prices during 2008, as reported this week by building society Nationwide.
Despite hopes of a boost from a weaker pound, survey data from the UK’s manufacturing and services sectors show activity levels close to record lows.
Meanwhile, retailing casualties such as Woolworths and Zavvi have mounted on the high street as shoppers cut back. Updates from the likes of Marks & Spencer, Next and Debenhams have been better than feared but they still reported declining sales as consumer confidence slumps.
And the Bank’s latest credit conditions survey warns lending to households and businesses is set to fall further during the first three months of this year -leading to more house price falls, corporate failures, and job losses.
The dramatic interest rate cuts have come because the MPC’s mandate is to keep official inflation at 2%. It is currently well above target at 4.1%, but will fall dramatically as prices tumble on lower demand in a recession, while moves such as the Government’s VAT cut add to the downward pressure.
How much homeowners and borrowers will gain from any rate cut remains to be seen after building society Nationwide said it would invoke a “collar” clause enabling it to stop reducing rates on most of its tracker mortgages. Other lenders could follow suit.
But savers are also in the spotlight following the huge rate cuts seen so far - with those such as pensioners relying on savings to top up their income punished by the lower return on the nest-eggs.
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