Bank of England cuts interest rates again

Thursday 4th December 2008

The Bank of England has cut interest rates by one per cent – the third cut in interest rates in three months.

The monetary policy committee's (MPC) decision has come after a week of poor economic, mortgage and house price data and puts the base rate at two per cent – the lowest level since 1939.

Last month saw a 1.5 per cent cut, after a 0.5 per cent reduction in October, so rates have dropped from five per cent to two per cent in three months.

The move comes after the MPC admitted they wanted to make a larger cut in November – as inflation is now falling fast.

Howard Archer, chief UK economist at Global Insight, said: "The minutes of the November meeting of the MPC certainly opened the door very wide for another sharp interest rate cut in December.

"Not only were all nine MPC members in favour of slashing interest rates by 150 basis points, but they even considered that a cut 'possibly in excess of 200 basis points' might be needed to try to ensure that consumer price inflation did not undershoot its two per cent target.

"Since the November MPC meeting, the UK economy has continued to deteriorate markedly and credit conditions have remained extremely tight."

He added the MPC was also held back from big cuts in November as it waited to see what fiscal stimulus plans the government would unveil in the pre-Budget report.

"While the government announced a £20 billion fiscal stimulus package and unveiled sharply higher public borrowing over an extended period, this did not appear to stand in the way of further substantial cutting of interest rates by the Bank of England," he added.

Dr Archer also explained he expected interest rates to drop to one per cent in the early months of 2009 and then stay there for the rest of the year.

There has even been speculation that interest rates could fall further – to record lows in the coming year – even to zero per cent.

Rupert Lee-Browne, chief executive of Caxton FX, said: "There is a historical precedent here. When Japan faced a banking crisis in 1989, it was followed by deflation and rates were eventually cut to zero per cent in order to re-inflate the economy.

"Interest rates in Japan currently stand at 0.3 per cent."

This morning Sweden cut its interest rates by 1.75 per cent to two per cent – posting speculation the European Central Bank will also make big cuts when it sets rates this afternoon.

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