- Title: UK/FILE: Britain slashes interest rates
- Date: 7th November 2008
- Summary: (BN11) LONDON, UNITED KINGDOM (FILE) (REUTERS) VARIOUS OF BANK OF ENGLAND
- Embargoed: 22nd November 2008 12:00
- Topics: Finance
- Reuters ID: LVAKRMWOLKLH7UUJ8F0FMCSUUNR
- Story Text: Britain's central bank shocks markets with a record 1.5 percentage point interest rate cut in response to a dismal economic outlook.
Britain slashed borrowing costs by a record 1.5 percentage points on Thursday (November 6) and the European Central Bank (ECB) also cut rates as part of concerted efforts to revive world commerce and ward off deep recession.
The ECB met market expectations by reducing its interest rate by half a percentage point, a move political leaders hope will limit any move into recession and curb job losses.
The Bank of England, faced with a slumping housing market, a decline in manufacturing and increased unemployment, astonished analysts by announcing a hefty 1.5 percentage point cut, the biggest since the Bank gained independence to set rates 11 years ago and a mark of the gravity of concern over the economy.
Martin Weale, director of the National Institute of Economic and Social Research, was among those who applauded the move.
"Obviously I am surprised. I think that as we've never seen a change of more than half a percentage point before, to see a change of one and a half percentage points is, let's say, out of the ordinary. On the other hand, I think that the Monetary Policy Committee has taken the very sensible view that if they think interest rates should be at three percent early next year, then why not put them there now?" said Weale.
Heavy U.S. job losses, a sharp decline in the world services sector and bleak company outlooks painted an increasingly dark picture this week, but rate cuts may be less effective than in the past. Banks infected by a collapse of confidence within the financial system are still wary of extending loans and are reluctant to pass cuts on to borrowers. But the sheer scale of Thursday's cut will put pressure on British banks to conform and back smaller businesses, some facing bankruptcy.
Weale warned the biggest risk from such a move may not be that monetary policy makers had gone too far, but that "not very much" happens as a result.
"While a large cut may be good for people's confidence at the moment, if at the end of the day banks still think they don't want to lend to customers they regard as doubtful, house buyers see house prices are still falling so they don't want to borrow, people who have debts don't want to borrow to buy cars to add to those debts at the moment. There's all those factors. I think you can ask just how much impact a cut of this magnitude will have on the economy," said Weale.
At three percent, UK interest rates are still above those in the U.S.
The ECB move took its benchmark rate to 3.25 percent.
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