Bank of England Cuts Rate to 1%

The Bank of England cut the benchmark interest rate to the lowest since the bank was founded in 1694 to help drag the British economy out of the deepening recession., Bloomberg 2/5/2009 5:24:35 AM

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate to 1 percent from 1.5 percent. The decision matched the median estimate of 61 economists of a Bloomberg News survey.

The U.K. economy will shrink the most since 1946 this year and faster than any other industrialized country, International Monetary Fund forecasts show. Prime Minister Gordon Brown’s government has given the central bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper as interest rates lose their potency to aid economic growth.

King will present the bank’s updated economic forecasts on Feb. 11. Minutes of this month’s meeting, showing how the members voted, will be published on Feb. 18.

The Bank of England has now lowered its rate by 4 percentage points since October. The U.S. Federal Reserve has reduced its key rate to a range between zero and 0.25 percent. The European Central Bank kept its rate at 2 percent today.

The bank said there is a substantial risk” that inflation will fall too far below the 2 percent target even though rate cuts since October, a 20 billion-pound package of tax cuts, cheaper commodities and a sharp drop in the value of the pound are likely to provide a considerable stimulus.”

King’s next step may be to pump additional money into the financial system. He said Jan. 20 that the central bank will buy high-quality” assets within weeks and not months” to ease market strains, a policy in line with similar measures pursued by Fed Chairman Ben S. Bernanke.

Brown and King are trying to rescue an economy that will contract 2.8 percent in 2009, according to IMF forecasts. House prices fell an annual 16.4 percent in January, mortgage lender Halifax said today.

The downturn is cooling inflation. Consumer prices rose 3.1 percent from a year earlier in December, compared with 4.1 percent the previous month, the biggest drop in the annual rate since records began in 1997. The central bank’s target is to keep inflation at 2 percent.

Bank of England Cuts Rate to 1%