Bank's massive rate cut is double-edged sword

By David Milliken - Analysis

LONDON (Reuters) - The Bank of England's decision to cut interest rates to their lowest level since 1954 is a double-edged sword, with the huge size of the move likely to prompt fear as well as relief.

The biggest rate cut since a recession in 1981 is a clear attempt to shake off accusations that the Bank has been too slow to make monetary policy suit an economy that is rapidly succumbing to the global credit crunch.

But the scale of the reduction, which lowered rates by a third to 3.0 percent from 4.5 percent, may also confirm Britons' worst fears about the health of the economy.

"It's not a silver bullet," said Jason Simpson, UK rates strategist at the Royal Bank of Scotland.

"They're trying to get ahead of what the market was pricing in order to boost confidence, but they do risk ... (implying) that the economic situation is so dire that they needed to cut rates by an unprecedented amount."

Some economic indicators have been hitting depressing records. Factory output data on Wednesday showed the longest unbroken decline since 1980, and well-known employers such as carmaker Nissan and brewer Carlsberg have been shutting plants in Britain, either temporarily or for good.

But the economy has not yet hit rock bottom, and the longer-term economic benefit of Thursday's rate cut will hinge on whether it succeeds in driving down borrowing costs for firms and households.

The scale of the Bank's move may also be an attempt to force down LIBOR interbank lending rates that underpin much private sector borrowing.