Bank of England Cuts Rates to 5%


The BoE cut interest rates from 5.25 per cent to 5 per cent on Thursday, acting to offset the effects renewed strains in money markets are having on household and corporate borrowers.

The Bank said in a statement the cut was justified when balancing the risk of inflation overshooting target against that of disruption in financial markets triggering a slowdown sufficiently sharp to pull inflation below the target”.

Credit conditions have tightened and the availability of credit appears to be worsening,” the Bank said.

The latest cut interest rate cut follows a similar move in February and brings the total reduction in the key lending rate by the Bank to 75 basis points from a peak of 5.75 per cent.

Business groups welcomed the move, but there was little reaction in markets, which had largely priced in the quarter point cut widely expected by economists.

It follows mounting evidence that access to credit is becoming more difficult or costly for many borrowers, with signs that growth is slowing in the service sector, and consumer confidence weakening in tandem with the stagnant housing market.

However, the cut in official interest rates may be little comfort to households, with the rates lenders are quoting for fixed rate mortgage little changed from last summer despite the easing in monetary policy that has already taken place.

Several mortgage lenders, including Halifax, Nationwide and the Woolwich, said they were cutting their standard variable rate in line with the Bank’s move, but many have just raised rates on the fixed rate products most popular with borrowers.

The Bank has already signalled it is set to cut rates further as the economy slows. But its scope to loosen policy will be limited by persistent concerns over inflation - which will not be helped by the pound’s latest fall, pushing up import prices.

The consultancy Capital Economics thinks rates will fall to 4 per cent by the end of this year, but Allan Monks, economist at JPMorgan, said he would view April’s cut as a decision to cut early rather than step up the pace of easing”.

So far, evidence the extent of slowing in the real economy is mixed, with official data from the retail and manufacturing sectors showing few signs of weakness, and the labour market holding up.

The risks of a more painful correction have been highlighted by the IMF’s bearish forecast that UK growth will slow to 1.6 per cent this year and in 2009 – much more gloomy than forecasts by the government and most independent analysts.


Financial Times
4/10/2008 6:35:49 AM