Bank Rate slashed to 3 per cent
06 11 2008 United Kingdom
In a completely unexpected move, the Bank of England’s Monetary Policy Committee slashed the official bank interest rate by 1.5 percentage points in the face of a rapidly deteriorating outlook for the UK economy
The Monetary Policy Committee (MPC) today voted to reduce the bank rate from 4.5 to 3 per cent, in a strong response to sharp falls in the UK economy and the prospect of imminent recession.
The announcement pointed to the very sharp drop in UK output and the fall in oil prices, down by more than a half, presenting the possibility of inflation undershooting the target of 2 per cent set by the government.
Today’s decision shows a marked shift in the MPC’s position. The announcement says that there has been a substantial downward move in the prospects for inflation in the United Kingdom over the past two months, although it had indicated earlier that the half-point reduction in October was a ‘one off’ move.
The MPC now says that energy and food prices will fall, in spite of the fall in sterling, and inflation should soon drop back sharply.
Some economists expected that sterling would bounce back after a further cut in bank rate, following a series of falls in the exchange markets. However a cut of 1.5 percentage points could underline the UK's economic weakness and trigger a large fall in the pound's value.
Today’s decision is without precedent since the 2 point fall in the Minimum Lending Rate in November 1980.
In a second round of cuts since the co-ordinated action last month, the Bank of Japan has lowered its interest rate to 0.3 per cent and the US Federal Reserve reduced its rate by a further half point to 1 per cent.
Today the European Central Bank lowered its interest rate by half a percentage point to 3.25 per cent in an attempt to prevent a recession in the Eurozone.
The previous change in Bank Rate was a reduction of 0.5 percentage points to 4.5 per cent on 8 October 2008.
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