Interest rates fall to record low as recession bites

INTEREST rates were today cut by 0.5% to a record low of 1.5%.

The half point reduction means it is the first time interest rates have fallen below 2% since the central bank was created in 1694.

In its statement, the bank warned that the slowdown in the economy during the past quarter would prove more severe than seen in the previous three months.

The rate-steering Monetary Policy Committee also noted signs that consumer spending was falling, and that the outlook for business investment and housebuilding was continuing to decline.

The pound climbed to a three-week high against both the dollar and euro, as a more aggresive cut had been feared. 

The move was generally welcomed by business leaders and economists but they warned that interest rate cuts alone would not lift the economic gloom.

Chris Fletcher, deputy chief executive at Greater Manchester Chamber, said the Bank of England was “absolutely right”.

“In light of the recent announcements regarding the high street and worsening conditions in other sectors, the decision makers must use every tool at their disposal.

“However, a rate cut on its own is not enough and this has to be passed on by lenders as well as easing access to finance.

“The other slightly worrying element is that the interest rate ‘ammunition’ for tackling the economy is rapidly running out so it is imperative that this is not the only action that is taken; it has to be one of a series of coordinated measures.”

John Simpson, senior investment director at Rensburg Sheppards in Manchester, said: “There is no doubt that the economy is going to fall sharply.

“The Chancellor is predicting that the economy will shrink by no more than 1.4%. However, there is a body of opinion that says we could be looking at a fall of up to 3% and so deflation is a serious risk.

“I think the bank had scope to make a more aggressive cut than today’s 0.5% to head off this threat and re-inflate the economy.”

Simon Allport, Manchester senior partner at Ernst & Young, said the cut was appropriate, but that further cuts in coming months would be needed.

“The MPC is worried about sterling, but though further falls are a risk, a weaker currency would help to avoid a deflationary slump. While a zero-interest rate policy and quantitative easing may not be needed yet, they remain policy options,” he said.

The view was echoed by the Institute of Directors’ chief economist, Graeme Leach, who said that interest rates will be pushed towards zero.

He said: “The MPC’s cautious reduction highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy and also whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money.

“Record low interest rates, a sharp sterling devaluation and the reduction in VAT have combined with the Christmas period to encourage the bank to hold back from a deeper cut for the time being”.

But Phil Rogers, director of Preston-based Taylor Patterson Financial Planning, said the cut has left the Bank of England with little margin for any further adjustments and is endorsing further weakness in terms of the UK’s economic position.

“Confidence is key, and a cut made so early on in the year means there is little room for movement in the future,” he said.

“Many in business would have preferred to have seen the rate stay where it was, allowing further adjustments to be made later in the year. It remains to be seen whether this cut will help or hinder.”