Interest rates cut to 1%

INTEREST rates were cut by 0.5% to a new low of 1%.

Although widely expected, the further reduction by the Bank of England’s Monetary Policy Committee has been questioned by some business leaders and economists, who say it is not making it easier for companies to borrow money, because banks are still not lending.

Instead, the Bank has been called on to do more to restore lending levels, possibly through the creation of a ‘toxic bank’. 

The latest fall was the fifth reduction since October last year, when the UK economy began to slide into recession.

In a statement the Bank of England explained: “The global economy is in the throes of a severe and synchronised downturn… Business and household sentiment in many countries has deteriorated. The weakness of the global banking and financial system means that the supply of credit remains constrained.”

Both the Federation of Small Businesses and think tank National Institute of Economic and Social Research had called for rates to be held this month.

Ilona Krohn, principal economic advisor at Greater Manchester Chamber, said: “Since past rate cuts do not seem to have had the desired effect, it is quite clear that broader action is needed.

“At the heart of our current economic situation is a global crisis of confidence and we would like to see decided, consolidated and coordinated international action to restore faith in the economic system.”

Simon Lord, managing director of corporate finance at Altium in Manchester, said the central bank must ensure that monetary policy remains credible so that it can be an effective tool in the future.

“Interest rates are now so low that they may stifle the supply of savings for investment. Credit-easing policies, such as the new ‘toxic bank’ scheme, will help banks rebuild their balance sheets and encourage lending again,” he said.

Simon Allport, Manchester senior partner at Ernst & Young, said the markets would be relieved to get the 50 basis point cut they were expecting and that future cuts would be on the cards.“We expect interest rates have further to fall – possibly to zero,” he said.

“The Bank of England has had a difficult task; six months ago the Bank was balancing slowing economic growth with accelerating inflation. However, the Bank now has to act to avoid deflation without fear of a further weakening of sterling; a weaker currency should serve to add to the competitiveness of exports.  

“While survey data indicates that the pace of decline in activity may be slowing, output is still falling and we expect GDP to keep falling into 2010.”

The Bank of England revealed earlier this week that it had lent £185bn to financial institutions since April last year, to try to bolster their liquidity.

Last month’s half point reduction meant it is the first time interest rates have fallen below 2% since the central bank was created in 1694.