Interest rates cut by 0.25%
THE Bank of England has cut UK interest rates by a quarter of a percentage point to 5.25% from 5.5%.
Many analysts expected the cut and predict more this year, but say inflation fears will stop the UK cutting rates as much as the US.
The Bank said in January that the risk of inflation had “worsened markedly”.
While the most recent UK inflation data showed that national consumer price inflation remained at 2.1% for the third month in a row in December, energy prices have increased substantially since then.
Analysts said that the Bank has to juggle the threat of slowing economic growth with the risk of faster price growth.
Commenting on today's MPC decision, Gary Williamson, acting chief executive of Leeds Chamber of Commerce said: “Whilst we understand the MPC's reluctance to give a misleading impression of panic it is critical that they avoid undue delay and counter the mounting threats to the economy. Therefore the local business community will breathe a sigh of relief at today's decision to cut interest rates to 5.25%.
“In the face of worsening global and domestic conditions, a refusal to act would have entailed unacceptable risks. Today's move, though vital to sustain confidence, is no longer adequate on its own. Threats to growth are much more acute now than risks of higher inflation, and we would have welcomed a bold move to 5% today.
The CBI's chief economic adviser, Ian McCafferty, said: “The Bank's own forecast in November suggested that two rate cuts of 0.25% would be required to meet its inflation target in 2009, and today's cut brings the base rate down towards a more neutral position. This should help ensure that there is a soft landing to the slowdown now underway.
“Looking ahead though, the Bank must balance the effect that cutting rates while inflation is rising might have on its credibility, with the likelihood that further out the slowing economy will have brought inflation back below the 2% target.”
Professor Peter Spencer at the University of York and chief economic advisor to the Ernst & Young ITEM Club, said: “The cut in interest rates was widely expected. If the Bank of England had not cut, frankly all bets would have been off and the ITEM Club's predicted GDP growth for 2008 of 1.8% would not have had a '1' in front of it. Furthermore the ITEM Club believes the Bank of England need to cut interest rates by at least a further half a percent over the course of 2008 to bolster the economy and to prevent the crisis in the credit markets sparking an economic downturn.”
Nimble Thompson, regional chairman of the Institute of Directors (IoD) in Yorkshire and the Humber, said: “The monetary policy committee was right to cut interest rates by a quarter point as there has now been sufficient time to fully assess the growth and inflation performance over the December and January period.
“Although the UK economy is holding up relatively well in the face of the global slowdown, businesses will welcome the decision.
“It is important that the rate reduction is passed on by lenders to individuals speedily to keep confidence overall and to help the retail sector.”
