caveman_nige
8th January, 2009, 01:59 PM
The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.
The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.
Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.
The Bank has now reduced rates four times from October's 5% level.
Explaining its decision, the Bank said the level of contraction in business activity had "increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year".
It added: "Surveys of retailers and reports from the Bank's regional agents imply that consumer spending has weakened."
'Why wait?'
BBC economics editor Hugh Pym said the Bank was now being more cautious after the sharp cuts in interest rates in November and December.
"There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months," he said.
Rates are now at their lowest level in the Bank's history
Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there.
"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," she said.
Mortgage impact
Most mortgage customers with tracker deals will automatically have the cut in interest rates passed on to them by their bank or building society.
Customers with an average ?150,000 repayment mortgage will see their monthly bill drop by ?46.
Those tracker deal customers with a ?250,000 mortgage will see their monthly payments drop by ?76.
But those on standard variable rate deals must wait for a decision from their lender, most of which are currently saying their rates are under review.
Injecting money?
The Bank's latest rate reduction comes as the Treasury has denied reports it is planning to inject more money, a policy known as quantitative easing.
QUANTITATIVE EASING
-To avoid the risk of deflation, a central bank boosts the money supply
-Done by writing out cheques to banks in exchange for assets, such as government bonds
-The hope is that the banks then lend on this money to individuals and firms
-The money supply is thus expanded
-More complicated than simply printing more notes
A number of newspapers said the step was being considered once interest rates fell close to zero as a tactic to help both stimulate the economy and avoid deflation.
Treasury sources said that while the move had not been ruled out, it was not currently on the agenda.
Institute of Directors chief economist Graeme Leach said the MPC's apparent caution in not cutting rates further this month "highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy".
He added that there also seemed to be uncertainty over "whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money".
Bank of England Statement in Full:
The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 1.5%.
The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
In the United Kingdom, business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. Surveys of retailers and reports from the Bank's regional Agents imply that consumer spending has weakened.
The outlook for business and residential investment has deteriorated. And the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector. But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax. Measures of inflation expectations have come down. And pay growth remains subdued. But the depreciation in sterling will boost the cost of imports.
At its January meeting, the Committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed.
Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate.
Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.5% was necessary to meet the target in the medium term.
The minutes of the meeting will be published at 9.30am on Wednesday 21 January.
The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.
Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.
The Bank has now reduced rates four times from October's 5% level.
Explaining its decision, the Bank said the level of contraction in business activity had "increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year".
It added: "Surveys of retailers and reports from the Bank's regional agents imply that consumer spending has weakened."
'Why wait?'
BBC economics editor Hugh Pym said the Bank was now being more cautious after the sharp cuts in interest rates in November and December.
"There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months," he said.
Rates are now at their lowest level in the Bank's history
Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there.
"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," she said.
Mortgage impact
Most mortgage customers with tracker deals will automatically have the cut in interest rates passed on to them by their bank or building society.
Customers with an average ?150,000 repayment mortgage will see their monthly bill drop by ?46.
Those tracker deal customers with a ?250,000 mortgage will see their monthly payments drop by ?76.
But those on standard variable rate deals must wait for a decision from their lender, most of which are currently saying their rates are under review.
Injecting money?
The Bank's latest rate reduction comes as the Treasury has denied reports it is planning to inject more money, a policy known as quantitative easing.
QUANTITATIVE EASING
-To avoid the risk of deflation, a central bank boosts the money supply
-Done by writing out cheques to banks in exchange for assets, such as government bonds
-The hope is that the banks then lend on this money to individuals and firms
-The money supply is thus expanded
-More complicated than simply printing more notes
A number of newspapers said the step was being considered once interest rates fell close to zero as a tactic to help both stimulate the economy and avoid deflation.
Treasury sources said that while the move had not been ruled out, it was not currently on the agenda.
Institute of Directors chief economist Graeme Leach said the MPC's apparent caution in not cutting rates further this month "highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy".
He added that there also seemed to be uncertainty over "whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money".
Bank of England Statement in Full:
The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 1.5%.
The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
In the United Kingdom, business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. Surveys of retailers and reports from the Bank's regional Agents imply that consumer spending has weakened.
The outlook for business and residential investment has deteriorated. And the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector. But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax. Measures of inflation expectations have come down. And pay growth remains subdued. But the depreciation in sterling will boost the cost of imports.
At its January meeting, the Committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed.
Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate.
Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.5% was necessary to meet the target in the medium term.
The minutes of the meeting will be published at 9.30am on Wednesday 21 January.