Bank of England cuts interest rate to 4.5%

08 October 2008 / by Rachael Stiles
In a special meeting today the bank of England's Monetary Policy Committee voted to cut interest rates by half a percentage point, from five to 4.5 per cent.

Some hours before it was scheduled to meet, and a full day before the monthly announcement on the base rate is usually made, the MPC cut rates in conjunction with other countries, such as Canada, the US, Switzerland, Japan and the European Central Bank, to reduce strain in the financial markets.

Mortgage borrowers will rejoice at the news which is hoped to ease lending in the money markets. Savings account customers, while they will lament the reduction in rates on their investment, are currently more distracted by the safety of their deposits than potential returns.

James Caldwell, Director at Fair Investment Company said: "The Bank of England decision to cut the base rate to 4.5% will be welcome news to the mortgage market however there is a danger that some lenders will not pass on this cut to homeowners."

While inflationary pressures have prevented the Bank of England from cutting rates for several months, despite calls to ease conditions for lenders and struggling mortgage borrowers, the Bank has now said that these pressures have "started to moderate" and that the recent intensification of the credit crisis has begun to outweigh the risks to growth that such a rate cut poses.

Inflation is already at twice the Government's self-imposed target of two per cent, and the MPC expects it to rise above five per cent in the coming months as the full effect of food and energy price hikes is felt in UK homes. But, the MPC believes that inflation will drop back and that the money market is currently in greater need.

The Committee realises that a cut in interest rates alone is not enough to resolve the current problems in the economy, and that a major injection of capital would also be required. It therefore welcomed the news from the Treasury this morning that the Government will be launching a £50billion bail-out plan to recapitalise Britain's major banks.

In a statement released today, the MPC said that it "remains focussed on setting Bank Rate in order to meet the 2% inflation target. In doing so it continues to balance two risks. On the downside, there is a risk that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulls inflation materially below the target. On the upside, there is a risk that above-target inflation this year and next raises inflation expectations so that inflation persists above the target for a sustained period.

"During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the Committee judged at its October meeting that an immediate reduction in Bank Rate of 0.5 percentage points to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term."

© Fair Investment Company Ltd