Bank of England cuts rate again and boosts money supply

05 03 2009 United Kingdom

The Bank of England’s Monetary Policy Committee has cut the official Bank Rate from 1 per cent to 0.5 per cent and will finance £75 billion of asset purchases from its central reserves.

Exports have shown improvement as the past depreciation of sterling began to take effect, said a statement by the Bank's Monetary Policy Committee (MPC), but UK unemployment has risen, consumer spending has fallen and industrial output dropped sharply in the fourth quarter of 2008.

These all pointed to inflation falling below the government target of 2 per cent, so the MPC decided to reduce Bank Rate to 0.5 per cent.

The MPC also noted that ‘a very low level of Bank Rate could have counter-productive effects on the lending capacity of the banking system’. This meant that further action was required to boost the supply of credit and raise the rate of growth of spending.

As a first step, the MPC agreed that the Bank would finance £75 billion to inject new money into the economy, financed from central bank reserves. A programme of this size might take up to three months to carry out.

Ian McCafferty, CBI Chief Economic Adviser, said:

“With interest rates already at very low levels and their impact on economic activity muted by the credit crunch, the Bank needs to use other tools to support economic activity and mitigate the risk of the start of a deflationary spiral.

“Though this latest cut will help support business and consumer confidence, it is unlikely to have a dramatic impact on the cost or availability of credit.

“But it is the right move", he said.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 1.0 per cent on 5 February 2009. At the beginning of March last year the base rate stood at 5.25 per cent.

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