Bank cuts rates to 2%By Norma Cohen
Published: December 4 2008 12:00 | Last updated: December 4 2008 12:00
The Bank of England on Thursday cut its key rate by a full percentage point to 2 per cent, equal to the lowest level since the Bank was founded in 1694.
The last time the Bank of England cut interest rates from 3 to 2 per cent was October 26 1939, after Britain entered the Second World War.
Although the country is hardly on a wartime footing, there could be disappointment that the Bank has not sought to counter growing concerns about a deflationary spiral more aggressively. The markets had begun to expect that Thursday’s move could be as dramatic as the 1.5 percentage point cut made at the Monetary Policy Committee’s last meeting in November. Early on Thursday, interest rate futures markets were predicting that the key rate would end up no higher than 1.5 per cent.
The move suggests either that the MPC is less convinced that deflation is a real possiblity than many private sector economists suggest or that it has other concerns about the impact of much lower rates, including worries over the slumping pound.
Sterling fell early on Thursday by 0.75 per cent on a trade weighted basis.
There may also be some hesitation about more aggressive rate cuts among committee members who would rather that the MPC did not use all its fire power at once, but release it sparingly as the economy deteriorates.
The cut is still very significant by historical standards; rarely has the Bank cut by more than half a percentage point at a time.
It comes after key Purchasing Managers’ Index readings for the construction, manufacturing and services sectors hit record lows in recent days, with the future orders component of each predicting that worse is to come.
In addition, interbank lending markets are understood to have seized up again after a brief breathing spell following the government’s announcement that it would provide a £37bn taxpayer lifeline to the nation’s banks. That suggests that the woes of the financial sector are still too great to allow it to resume lending to households and businesses in a more normal pattern.
