Bank of England slashes base rate

Posted on 6 Nov 2008 by The Manufacturer

The Bank of England has today slashed interest rates by one-and-a-half per cent in an attempt to stave off recession.

With 150 basis points shaved off, the bank rate now stands at 3 per cent. That’s the lowest it’s been since 1955.

The news will come as a shock to much of the business world. Analysts earlier this week called for a full per cent drop yet debated the probability of three quarters. That was after the Purchasing Managers’ Index revealed another heavy contraction in the manufacturing industry in October following record lows the previous month.

In its official statement, the Bank of England said: “Since the beginning of the year, the Committee has set Bank Rate to balance two risks to the inflation outlook. The downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulled inflation materially below the target.

“The upside risk was that above-target inflation persisted for a sustained period because of elevated inflation expectations. In recent weeks, the risks to inflation have shifted decisively to the downside. As a consequence, the Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target.

“At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3.0%.”

Lloyds’ mortgaging arm Cheltenham and Gloucester is promising to pass on the full percent and a half drop onto its variable rate mortgage customers and this type of move was backed by Prime Minister, Gordon Brown. “What we’ve been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary,” he said.