Interest rates cut to historic 1.5%

THE Bank of England has cut interest rates by 0.5% to 1.5%.

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

It follows a drop of 1% to 2% last month – the lowest level they had reached in more than 50 years – and came after a chorus of calls by experts for the Bank’s Monetary Policy Committee to make a fourth consecutive monthly cut.

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

Although experts have said that cuts have been needed to help struggling consumers and businesses in the face of the steepening downturn, many mortgage lenders have been reluctant to pass on the Bank of England’s rate cuts to borrowers because of the turmoil in the banking sector.

HSBC has said it will pass on the cut to its borrowers.

Jonathan Riley, managing partner of Grant Thornton in Leeds, said: “The Bank of England is now dangerously close to running out of options. If these latest cuts don’t work, and I suspect they won’t, the only path left is for quantitative easing, where the Bank effectively prints money and uses this to buy up long term assets in the market place.
 
“Stating the obvious, it’s bad news for savers.  Banks are relying on them to deposit their money to improve their own personal balance sheet. But in light of this latest cut, savers would be better leaving their money under a mattress as they won’t benefit at all.
 
“Yes, this is great news for some, though certainly not for savers – but we have to ask ourselves the question, when is it going to come back to haunt us.”

Nimble Thompson, chairman of the Institute of Directors in Yorkshire and the Humber, said: “We welcome any action that could provide much needed financial relief to businesses and consumers. However, one must begin to question the impact of the Bank of England’s actions alone at this stage.

“The crucial point is that the Government must take urgent action to free up lending for businesses and consumers.”

Professor Peter Spencer of the University of York, who is chief economist at the Ernst & Young ITEM Club, said: “The Bank of England is now facing another balancing act. Six months ago, it was juggling slowing economic growth with soaring inflation. But now the Bank has to tread a path between avoiding deflation and a further weakening of sterling whilst doing all it can to soften the impact of the recession.”

“ITEM believes that a 50 basis point cut in the interest rate at this juncture was appropriate.  However, with survey data continuing to languish at record lows – manufacturing and services surveys in the past few days have confirmed that activity is falling sharply – we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months.”

“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.”

Balbir Panesar, president of Bradford Chamber of Commerce, who runs PEC Building Services, said: “We welcome the cut in rates today – any cut in rates at this time is to be applauded as things are becoming increasingly tough in different markets.

“But we have to ask whether the Bank should have taken that extra step and reduced rates to 1%, that is, a full 1% cut. Cutting interest rates on its own won’t solve the crisis, and we are mindful of the delicate balancing act that the Bank needs to do to ensure that sterling is not undermined too greatly; but these are unprecedented times.”

Gary Lumby, president of Leeds Chamber of Commerce, said: “Although today’s announcement comes as no surprise, interest rate reductions, though important, are no longer adequate on their own.
 
“Previous reductions need to be given time to work, however, these need to be supplemented by additional and more far-reaching policies – which provide further fiscal stimulus, just reducing interest rates is not enough.
 
“Both Government and The Bank of England need to continue to carefully monitor the economic situation and not be afraid to take action if this is required.”

The rate is now at its lowest since the Bank’s foundation in 1694 and the move comes amid worsening economic conditions, with a number of retailers going into administration and struggling to survive.

Ian McCafferty, CBI chief economic adviser, said: “Today’s more modest interest rate cut reflects the Bank’s recognition that interest rate reductions on their own cannot restore credit flows, the most important factor determining the prospects for the economy.
 
“However, this move to support business and consumer confidence will be welcomed. If credit flows can be restarted, the monetary stimulus now in the pipeline is significant, especially when the fall in the pound is taken into consideration. A more gradualist approach to rate setting is likely in the coming months.”

Matthew Jones, head of residential at Savills’ Leeds offices, said: “This further rate cut is unlikely to have an immediate positive impact on the mainstream housing market, either on activity levels or capital values. 

“For months now we have been stating that the fundamental downward pressure on the UK residential market is the lack of mortgage availability, not the cost of mortgages or the affordability of homes. Only when liquidity returns to the lending markets, and there is a sense that the worst of the recession is over, will the market hit bottom. 

“At that point, the combination of lower borrowing rates and falling house prices will combine to push housing affordability towards record levels, thus cementing the residential market upturn.”

James Thomas, head of residential investment at Jones Lang LaSalle, said: “Although the decision to cut base rates was welcomed, it is not expected to make much difference to UK homeowners in the short-term.

“Banks are expected to restrict lending further this year and this means life will remain difficult for potential buyers. Furthermore, rising unemployment and uncertainty about job security will see potential buyers very reluctant to commit to any purchases.

“The only sign of respite for the housing market is that the large interest rate cuts made last year are feeding through to the LIBOR rate. The three-month LIBOR rate was 2.65% at the start of 2009, down from a peak of 6.30% at the start of last October.

“Lenders’ standard variable rates are falling as a result, which will ease the pain somewhat for borrowers coming to the end of fixed-rate deals and unable to remortgage.”

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