Bank of England cuts interest rate to its lowest level ever

08 01 2009 United Kingdom

Following last year’s dramatic cuts in base rate, the Bank of England’s Monetary Policy Committee (MPC) has reduced the Bank Rate by 0.5 percentage points to 1.5 per cent.

As forecast by many economists, the MPC has decided to reduce base rate from 2 per cent to 1.5 per cent. This is set against calls by businesses for a full one point cut to 1 per cent, to unblock the freeze on borrowing by companies and consumers and help get the economy moving again.

The MPC noted that the pace of contraction in UK business activity increased during the fourth quarter of 2008 and consumer spending has weakened. Output is likely to continue to fall sharply during the first part of this year.

Further measures were needed to increase the flow of lending for consumers and businesses. Inflation is expected to continue to fall but the depreciation in sterling will boost the cost of imports. The cut of 0.5 percentage points to 1.5 per cent was made to meet the 2 per cent inflation target in the medium term.

Last month the Deputy Governor of the Bank of England, Sir John Gieve, admitted that the Bank had underestimated the economic crisis and failed to spot the severe consequences for the UK.

Base rate is now at the lowest level since the Bank of England was founded in 1694.

The previous change in Bank Rate was a reduction of 1 percentage point to 2.0 per cent on 4 December 2008.

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