Bank makes shock 150 basis point rate cut

By Sumeet Desai and Fiona Shaikh

LONDON (Reuters) - The Bank of England made a shock 1.5 percentage point cut in interest rates on Thursday to just 3 percent, their lowest level in more than half a century, as it seeks to prevent Britain from sliding into a deep recession.

That was the biggest official interest rate cut since the 1981 slump and completely wrong-footed analysts who had mostly been predicting a half-point reduction. Not one in 62 polled by Reuters had expected such a massive move.

The Bank said the economic outlook had got a lot worse and drastic action was now needed. Economists said more rate cuts would still follow and it was possible Britain could soon have rates the same level as in the United States -- 1 percent.

"The MPC needs to keep cutting interest rates aggressively. I think that they will need to fall to 1 percent," said Roger Bootle, an economic adviser for accountancy firm Deloitte.

"Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan."

The sharp cut came as the International Monetary Fund forecast that the British economy would shrink by 1.3 percent next year, far more than the United States, Japan or the euro zone.

Two-year bond yields fell to a record low below 2.5 percent. The pound, already down about 20 percent this year, fell but then rose after the rate verdict, as investors bet the economy's growth prospects had improved.

The British economy shrank for the first time in 16 years in the third quarter and most economists expect further contraction through next year and only a small recovery in 2010, when Prime Minister Gordon Brown must call an election.