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Bank of England cuts interest rate to 2 per cent - Summary


Published :
Thu, 04 Dec 2008 09:29
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London - The Bank of England (BoE) Thursday cut interest rates to 2 per cent in the second reduction in four weeks in a move aimed at stimulating the economy and avoiding a prolonged recession. Thursday's cut brings British rates down to their lowest level since 1951.

The recent round of significant cuts in the key lending rate began on November 6, when the BoE reduced rates by a drastic 1.5 percentage point to 3 per cent.

"Business surveys have weakened further and suggest that the downturn has gathered pace," the BoE said in a statement on Thursday's decision by its Monetary Policy Committee (MPC).

"Consumer spending and business investment have stalled, while residential investment has continued to fall," said the BoE.

The bank's decision was immediately welcomed by industrial leaders and in the City of London, as well as by mortgage lenders.

However, analysts said while the cut was "enough," it had to be followed by further reductions early next year.

"We need to be at 1.5 per cent in early spring," said Ian McCafferty, chief economist at the Confederation of British Industry (CBI).

City analysts said more cuts were needed quickly, with a key rate of 1 per cent - which would be the lowest-ever in the 300-year history of the BoE - on the cards in the first quarter of next year.

The bank's "decisive action" had also underlined that inflation, currently running at 4.5 per cent, was on the "back burner," a point reiterated in the bank's statement on the rate cut decision.

On the contrary, there was a "substantial risk of undershooting" the 2-per cent upper inflation target in the medium term, said the BoE, confirming deflationary fears.

The renewed cut in interest rates coincided with a set of gloomy economic news Thursday.

Statistics showed that new car sales fell by 36.8 per cent in November to just over 100,000, compared with the same month a year ago.

There was also evidence of an acceleration in the drop in house prices. Homes lost a further 2.6 per cent of their value in November, the biggest monthly drop since September 1992.

Last week, the government announced a string of measures to stimulate the economy, including a cut in Value Added Tax to 15 per cent from 17.5 per cent up to the end of 2009.

The growing number of homeowners facing the threat of repossession were assured by the government this week that mortgage interest payments could be deferred by up to 2 years under a new government scheme backed by the country's biggest banks.


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