Bank cuts rates to new record low

LONDON Thu Feb 5, 2009 10:09pm GMT

1 of 4. Pedestrians walk past the Bank of England in London February 5, 2009.

Credit: Reuters/Stephen Hird

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LONDON (Reuters) - The Bank of England cut interest rates by another 50 basis points on Thursday to a new all-time low of 1.0 percent, in a bid to pull the economy out of recession by getting consumers and companies spending again.

The decision was widely expected and analysts are now waiting for the central bank's new forecasts next week to see how much lower rates can go after already falling by a total of 4 percentage points since November.

"We continue to expect that the Monetary Policy Committee will cut rates to 0.5 percent or perhaps zero in the next few months," said Michael Saunders, economist at Citigroup.

Thirty two out of 53 analysts polled by Reuters said the Bank would cut again in March. The rest said rates have now bottomed.

Interest rates have fallen sharply around the world as the global economy experiences what the Bank described on Thursday as "a severe and synchronised downturn."

The Federal Reserve has already cut U.S. rates to a record low of between zero and 0.25 percent. In Japan, rates stand at just 0.1 percent. The European Central Bank kept its official rate at 2.0 percent on Thursday but is expected to cut them to a record low next month.

Central banks everywhere are having to consider what they do when interest rates hit zero and they still need to give the economy a boost -- a situation Japanese policymakers had to contend with at the start of the decade.

The Bank gained the powers to engage in quantitative easing -- adjusting the supply of money rather than its price -- last month but there was little mention of it in its statement accompanying the rate cut.


Instead, the central bank said there was a lot of stimulus already in the pipeline -- past rate cuts, the fall in sterling and commodity prices and a fiscal boost, repeating comments made after its January decision.

The pound gained on relief that rates had not gone down further but analysts said there would not be much clarity to the rate outlook until publication of the Bank's Inflation Report next Wednesday.

The Bank will probably find it hard to forecast inflation at anything much over 1 percent in two years, even with the weak pound pushing up the price of imported goods. It is required to keep inflation around 2 percent.

"Our view is that the weakness of the economy and the consequent size of the negative output gap will exert disinflationary forces outweighing the fall in sterling," said Philip Shaw, chief economist at Investec.

"We expect the Inflation Report to hint at further easing. We may also hear if the Bank has a technical aversion to near zero rates and whether quantitative easing could kick in before that point."

Industry figures published before the rate decision bore out the bleak outlook. Car sales in January plunged 30.9 percent on the year, the worst showing for the month since 1974. House prices unexpectedly rose in January, according to the Halifax index, but were still down 16.4 percent on the year.

The International Monetary Fund has predicted the British economy could shrink by 2.8 percent this year.

But low interest rates contain problems of their own. Savers are complaining of getting a raw deal.

"The rate cut is an assault on savers who will have seen their interest payments drop by 83 percent since July 2007," said Adrian Coles, director general of the Building Societies' Association. "Their lifestyles have taken a significant blow."

Treasury minister Stephen Timms called on the banks to take measures to help savers as well as borrowers.

"We do expect them to pass these benefits on -- although there are different ways they can do this, including supporting savers as well as helping borrowers," he said.

(Additional reporting by David Milliken, Fiona Shaikh, Christina Fincher and Jonathan Cable; Editing by Ron Askew)