Interest rates cut by 1.5%

INTEREST rates have been cut by 1.5% as the Bank of England takes bold action to try and  inject more confidence into the ailing UK economy.

It takes UK interest rates to their lowest level since May 1954 and follows a wave of cuts across the world as the Monetary Policy Committee(MPC) comes under pressure to halt Britain’s slide into a deep recession.

In recent days and weeks, the central banks of Australia, China, Hong Kong, India, Japan, Kuwait, Norway and Taiwan have joined the wave of global interest rate cuts.

The European Central Bank (ECB) is also set to cut its main lending rate sharply at a meeting later this afternoon.

The 1.5% reduction is the biggest rate cut in more than 15 years, and comes amid growing anger that banks are not passing on improved terms to lenders.

Yorkshire Bank chief economist Tom Vosa said that the move “suggests that the MPC have been sensitive to criticism that they were ‘behind the curve.'”

“It seems that the MPC have taken the opportunity of the November Inflation Report round to fundamentally revise down their growth and inflation forecasts for the UK economy in light of recent data releases.

“However, with inflation now forecast to remain at 2% in the medium-term, we doubt that the Committee will have to move again in December and January. In essence, the move means that the bank is front-loading monetary easing as much as possible, possibly in an attempt to persuade the UK banking system to pass through any rate cuts to borrowers.”

Keith Loudon, of Redmayne-Bentley Stockbrokers, said: “This is a shock move. It is the start of a dramatic move that is going to kick the banks who have been over-reckless and now over-cautious on lending. It should hopefully get rid of the psychological block that has prevented money moving around the system.

Commenting on today’s MPC decision to cut interest rates, Leeds, York & North Yorkshire Chamber of Commerce policy director, Ian Williams said: “Many businesses will welcome the reduction. The uncertain economic climate and the downturn many businesses have experienced and continue to experience have been well documented.

“This decision to cut interest rates will lift some of the mounting financial pressures that both business and consumers are facing.

Roger Bootle, economic adviser to Deloitte, said the move “shows that the MPC appreciates the seriousness of the situation”.

“But more needs to be done. I think that interest rates need to be cut to the unprecedented level of 1%, and quickly.

“Some may suggest that today’s cut smacks of panic. After all, in the 11 years since it was formed, the MPC has never before cut rates by more than 0.5%, no matter a reduction of 1.5%.

“But never before has the MPC faced the dangers that it does today. It is all very well moving interest rates by a quarter point here and there when the economy is expanding at a rate only just above or just below its trend rate. But as highlighted in the MPC’s statement released alongside today’s decision, the latest indicators suggest that the economy has pretty much fallen off a cliff.”

Ron McMillan, northern chairman at PricewaterhouseCoopers, commented: “The Bank of England Monetary Policy Committee definitely moved in the right direction today by cutting interest rates to 3%. This should boost business and consumer confidence and help ensure the direction of travel of the UK economy is towards an earlier recovery rather than a deep and prolonged recession.”

Lobby groups including the Confederation of British Industry and Institute of Directors have welcomed the move after both organisations called for a full point cut.

Professor Peter Spencer at the University of York and chief economic advisor to the Ernst & Young ITEM Club, said: “Today’s rate cut by one-and-a-half percentage points to 3% was far bigger than expected. The MPC is now ahead of the game. It obviously felt that a substantial cut was necessary to head off serious damage from the recent deterioration in the financial markets.

“However, aggressive cuts will be insufficient to prevent the economy entering recession. Nonetheless, they could make it a less painful experience. If banks remain unwilling to fully pass on rate cuts, further monetary loosening will be needed to support the real economy.”

Andrew Palmer, CBI Yorkshire & Humber regional director, said: “This is a bold and welcome move by the Monetary Policy Committee.

“Business and consumer confidence has been deteriorating sharply in recent months, and recession has replaced inflation as the major threat to the economy over the next year or two.

“This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers.”

The half-point cut on October 8 was part of coordinated emergency action by central banks worldwide.

The economy is meanwhile on the verge of a recession after contracting for the first time since 1992 in the three months to September, according to recent official data.

The country is not officially in recession until it reports two successive quarters of negative economic growth.

Welcoming the MPC’s announcement businessman Tim Chorlton, director at Leeds-based design business The Factory said: “I feel that if the drop in interest rates does encourage consumer spending to increase then all businesses will very quickly begin to feel the lifeblood of the economy start flowing again.

“As a small business I welcome the lowering of the interest rate as it helps many of our customers have a little confidence in starting spending again.”

Will this stimulate the British economy or is it a panic measure by the Bank of England? Add your comments below.