Bank of England cuts interest rates to 1 per cent (Roundup)

Feb 5, 2009, 11:42 GMT

A view of the Bank of England in London, 05 February 2009. EPA/ANDY RAIN

London - The Bank of England (BoE) Thursday cut interest rates to an historic low of 1 per cent amid predictions that the key lending rate could soon move 'to zero or close to zero.'

The bank's decision to cut borrowing costs by 50-basis-points follows monthly rate cuts since last October, when the key lending rate in Britain stood at 5 per cent.

'The global economy is in the throes of a severe and synchronized downturn. Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly,' the BoE said in a statement.

'The weakness of the global banking and financial system means that the supply of credit remains constrained,' it added.

The move, which was in line with market expectations, comes amid speculation that the bank, having all but exhausted the tool of rate cuts, could soon move to inject billions into the economy through a process known as quantitative easing.

The Times newspaper Thursday criticized the successive rate cuts, saying they had not helped to unfreeze the credit stalemate and were penalizing savers.

As analysts predicted that British rates could move to zero later this year, the BoE said in its statement that previous rate cuts would eventually have a 'significant impact' on aiding the economy, alongside the current weakness of the pound and falling inflation.

But until these feed through, there was a 'a substantial risk' of of undershooting its 2-per-cent inflation target if interest rates had remained at 1.5 per cent.

The renewed interest rate cut decision came amid unemployment of close to two million, a marked slowdown in consumer spending, as well as falling house prices.

The rate cut was welcomed by banks and business groups, which have campaigned for lower borrowing costs to stimulate lending.

'This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy,' said Ian McCafferty, chief economic adviser to the Confederation of British Industry (CBI).

But he added that while credit mechanisms were 'still impaired,' it was vital for the BoE to supplement Thursday's move with 'direct intervention in the corporate lending markets.'

The main reason why the economy was struggling was the availability, and not so much the price, of credit, said McCafferty.

The government of Prime Minister Gordon Brown has said it will do 'everything necessary' to soften the impact of the recession and get borrowing going again.

Mervyn King, the governor of the BoE, said recently that 'unconventional measures' could be required to boost the economy.