Interest rates cut to 1%
The Bank of England has cut interest rates by a half point to 1%, their lowest level in over 300 years, as it tries to drag Britain out of recession.
The monetary policy committee voted to cut the cost of borrowing again today to a new record low after hearing fresh evidence that the UK economy is in poor shape.
Some in the City had hoped for a full percentage point cut to help struggling businesses.
The cut will be welcomed by borrowers and homeowners, coming just hours after the unexpected news that house prices rose by 1.9% in January. The latest data fom the Halifax put an end to months of falls and took many commentators by surprise.
If lenders pass the reduction on in full to borrowers, people with mortgages that track a point below base rate will find themselves paying no interest.
But the decision spells further gloom for savers as savings rates fall to virtually zero.
The MPC warned that its latest data shows that business output is still declining. “Credit conditions faced by companies and households have tightened further. The underlying picture for consumer spending appears weak,” it said.
However, the committee also insisted that its recent rates cuts will stimulate the economy.
Nick Parsons, head of markets strategy for nabCapital, predicted that today’s cut will be the last one of the current economic cycle.
“We could be here at 1% for at least a year and possibly longer, and the next rise will be upwards,” said Parsons, who warned that further cuts could force savers to pull their money out of banks and building societies.
But Howard Archer, chief UK and European economist at IHS Global Insight, believes rates will fall to 0.25% by this summer.
“The UK economy clearly remains deep in recession with recovery seeming a distant hope, so it needs all the help that it can get,” Archer said.
Business leaders called on the Bank to take more measures to unfreeze the supply of credit, by intervening directly in the corporate lending markets.
“The half-point cut is seen as good news for the UK, and a sign that the Bank is still prepared to act,” said Richard Turner of IG Index.
The MPC has now cut the cost of borrowing for five months in a row. Last October interest rates were still 5%, but have now tumbled to their lowest level since the central bank was founded in 1694.
Eurozone rates, though, were left unchanged at 2% following the European Central Bank’s meeting today.
The weakening British economy
The rate decision is the first since the UK’s recession was officially confirmed a fortnight ago. And last week the International Monetary Fund warned that Britain would be the worst hit major economy in what is expected to be the “deepest recession since the second world war”.
Britain’s economic output slumped by 1.5% between October and December – the biggest fall in nearly three decades – following a 0.6% drop in the previous quarter.
The Bank is due to release its latest forecasts for the economy in its quarterly inflation report next Wednesday.
Michael Saunders at Citi believes it will make bleak reading. “The Inflation Report, prepared in the run-up to the MPC meeting, is likely to show the weakest economic forecast the MPC has ever prepared, as well as the biggest downgrade,” said Saunders.
As interest rates get closer to zero, the Bank has hinted that it is considering more unconventional measures in a bid to stave off a long and deep recession.
King has been given the green light to spend £50bn of taxpayers’s money to buy company debts and other assets, suggesting that Britain is moving towards quantitative easing. Such radical action is also known as “turning on the printing press” - pumping money into the economy to get people and businesses spending again and to prevent deflation.
As the gloom surrounding the economy deepens, thousands of jobs are lost every week, pushing unemployment towards 2 million. David Blanchflower, the Bank’s labour market expert who voted to reduce rates by a full percentage point in January, has warned that unemployment is likely to top 3 million next year.
Many banks and building societies have yet to pass on last month’s half-point base rate cut to borrowers on their standard variable rates, while slashing their savings rates. Pensioners are among those hardest hit.
The Building Societies Association had called on the MPC not to reduce the base rate further in a bid to protect savers. It warned that people would be even less likely to save after another rate cut, which could further reduce the funds that lenders have available for mortgage lending.
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