Interest rates cut by 0.5%

INTEREST rates have been cut by 0.5% as the Government announced details of a £50bn rescue package for the banking industry.

The cut by the Bank of England, which takes UK interest rates down to 4.5%, has been mirrored by the US and European banks.

Seven central banks have cut their interest rates by 50 basis points.

The UK rate move had not been expected to be announced by the Monetary Policy Committee until Thursday.

The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank trimmed its rate from 4.25% to 3.75%.

The central banks of Canada, China, Sweden and Switzerland all took similar action in the co-ordinated move.

Leeds Chamber of Commerce president Gary Lumby said: “This decision will be welcomed by the local business community.

“We are all aware of current economic climate and the downturn businesses have experienced and continue to experience. The British Chamber’s report, earlier this week, highlighted this and called for the urgent need for a reduction in rates. And today’s decision will lift some of the mounting pressures both businesses and consumers are facing.

“Confidence is also a critical part of business and we have seen this reducing over the course of the year. This decision will help restore confidence among the business community and consumers, and potentially increase the levels of disposable income.

“We would now urge the MPC to keep a close eye on the economy and not be afraid to make further reductions when conditions permit.”

Sheffield Chamber of Commerce’s finance director Stephen Mitchell said: “We welcome this bold and necessary step.”

The Chamber said it hopes to see further reductions in the coming months.

Mr Mitchell said: “The economy is in an emergency. The move by the Bank of England should steady the markets and inject much needed confidence. Alleviating the dangers of a major downturn is the overriding priority and,  over the coming months, we would like to see interest rates cut again – to 4% as a minimum.”

The cut follows the unprecedented part-nationalisation of the sector which will make extra capital available to eight of the UK’s largest banks and building societies.

The Treasury said it wanted to ensure the banking system had the funds necessary to maintain lending.

In a statement it said: “In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity.”

The statement outlined the terms of the deal:

• It involves Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. Other banks will be able to apply for inclusion in the plan.
• The Government will make £50bn available to help the banks shore up their tier one capital – the preferred measure of balance sheet strength.
• In return the Government will receive preference shares.
• A further £200bn will be made available for short-term borrowing to provide liquidity to banks and building societies.
• Before reaching an agreement on loans the government said it will take into account, “dividend policies, executive compensation practices and will require a full commitment to support lending to small businesses and home buyers”.
• Institutions that raise tier one funding sufficiently will qualify for a £250bn government guarantee on new short and medium-term funding.

Will the interest rate cut make a difference? Let us know your thoughts below.