Bank of England cuts interest rates by 0.5%

Wednesday, 8 October 2008 5:58 PM

Gordon Brown has announced to the House of Commons the Bank of England is cutting interest rates by half a percentage point, as the world's central banks lower the cost of borrowing.

The prime minister said: "The governor of the Bank of England has just announced an immediate half a per cent cut in interest rates.

"He has done so in a coordinated action that is happening around the world. showing global problems are best dealt with by global answers."

The surprise move puts the Bank base rate to 4.5 per cent and comes a day before a decision was due to be made.

A statement from the Bank after a special meeting of the Monetary Policy Committee (MPC) explained inflation was expected to fall and the MPC was acting amid the current banking crisis.

"Conditions in international credit and money markets have deteriorated very markedly," the MPC stated.

"Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets.

"The committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required."

The interest rate cut comes with a joint move from the world's central banks to take on the banking crisis and also reduce the cost of lending by 0.5 per cent.

A joint statement read: "The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

"Some easing of global monetary conditions is therefore warranted."

The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank all today announced reductions in policy interest rates.

Following the decision the markets spiked up over 4,600 points.

The Bank of England explained inflation is still expected to hit five per cent, but the greater fear is a recession.

"Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially," the MPC stated.

"Output growth slowed to a halt in the second quarter, business surveys point to further weakening during the second half of this year, and the labour market has softened.

"Consumer spending growth has slowed, in part as a result of the squeeze on real incomes, while business and dwellings investment have declined. Equity prices have fallen, and the further tightening in credit conditions will also weigh on domestic demand growth.

"The depreciation in sterling over the past year should support net exports, but the prospects for demand growth in the UK's main export markets have worsened. The weakness in output growth at home will open up a growing margin of spare capacity that will over time bear down on inflation."

Mortgage lenders have welcomed the cut.

Michael Coogan, director general of the Council of Mortgage Lenders, said: "Today's package of bank funding and capital measures is further strengthened by this rate cut.

"Not only are the tripartite authorities now pulling together decisively to address domestic confidence, but international central bankers are also collaborating much more effectively on their position.

"All this decisive action augurs well for an improving market situation looking ahead, even though no one is pretending the tough times are over yet."

Steven Marks, lending executive at Newcastle Building Society, explained further interest rate cuts can be expected.

"All the signs pointed to a rate cut and the emergency decision today is not a moment too soon to help restore market confidence," he said.

"The difficulties faced by banks and banking systems both at home and around the world in recent days and weeks, compounded with the slowing of retail spending and easing oil prices, means the authorities are now more concerned about an economic slowdown than inflation - indeed many believe we are already over the brink of recession. I believe these fears are also likely to drive further cuts in the months ahead."

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