Bank cuts rates to 2 percent

By Fiona Shaikh and Christina Fincher

LONDON (Reuters) - The Bank of England slashed interest rates to their lowest level since 1951 on Thursday but indicated more needed to be done to prevent a credit squeeze tipping the economy into a prolonged recession.

The one percentage point cut to 2 percent had been widely anticipated following a stream of unremittingly bleak economic indicators. Some in the market had been looking for an even bigger cut.

Both the government and the central bank have taken dramatic action to pump cash into the economy but businesses and households are still finding it hard to borrow.

In a statement accompanying the decision, the Bank noted that credit conditions remained extremely difficult and "it was unlikely that a normal volume of lending would be restored without further measures."

The government has already pumped 37 billion pounds of taxpayers' money into major banks to prevent them from collapse and offered unprecedented guarantees to encourage them to lend again. However, anecdotal evidence suggests banks are still battening down the hatches in an attempt to survive the worst financial storm for 80 years.

"Lowering borrowing costs will of course help, but what is currently even more important than the price of money is the quantity of money," said Philip Shaw, chief economist at Investec. "There is no point having very cheap money if no one will lend it to you."

UNCHARTED WATERS

Analysts said the Bank's comments left the door open for further rate cuts, and the money market was pricing in rates at 1 percent by June 2009, which would take monetary policy into uncharted territory. Interest rates have never gone below 2 percent since the central bank was created in 1694.