Bank fails to halt fear of slump

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THE BANK of England moved yesterday to prevent Britain slipping into recession next year by announcing a surprise half-point cut in interest rates.

Gordon Brown saw the decision as a vindication of the draft Budget he unveiled on Tuesday. But shares dropped by 2.5 per cent as some City analysts said the Bank's move suggested it did not share the Chancellor's optimism about the British economy.

The Monetary Policy Committee had been widely expected to reduce interest rates by a quarter of a point, but instead it cut them from 7.25 per cent to 6.75 per cent. It was the Bank's first half-point adjustment since the Government handed it responsibility for rates last year.

The decision provided immediate cheer for homeowners, as leading mortgage providers followed the Bank's lead and cut their borrowing rates by half a point. This will reduce payments on a pounds 60,000 mortgage by about pounds 20 a month.

While industry and the trade unions welcomed the Bank's move, there were fears in the City that the economic picture might be less rosy than Mr Brown painted on Tuesday. Traders said there could be "something lurking in the woodshed" that the Bank had not yet told them about. Poor figures on manufacturing output and retail sales failed to help market sentiment, and the FTSE-100 index of leading company shares fell 143.10 points to close at 5479.80.

The Bank's move will boost the Chancellor's prospects of delivering his prediction that Britain will avoid recession next year and then enjoy strong growth. But James Barty, UK economist at Deutsche Morgan Grenfell, said: "Gordon Brown's forecasts still look optimistic, despite the interest rate cut. We believe the economy is probably heading for a mild recession next year."

Paul-Mortimer Lee, at the Paribas bank, said the rate cut "tells you that the Bank thinks prospects are pretty poor".

Francis Maude, the Shadow Chancellor, told the Commons: "It is clear than not even the Bank of England believes the Chancellor's fantasy figures." To stem the toll of job losses, he said, the Government's figures should be revised in line with those of independent forecasters.

But Mr Brown welcomed the MPC's move as a vindication of his policies and insisted: "In an uncertain world, Britain is steering a course of stability."

Despite the doubts in the City, ministers believe the Bank's forecasts, to be published next week, will be broadly in line with the Government's prediction that growth will slow to around 1 per cent next year.

The rate cut was greeted with relief by business leaders. Kate Barker, chief economic adviser to the Confederation of British Industry, said: "Business will welcome this decision warmly as the right response to our warnings on the increased risk of a recession." Ruth Lea, head of policy at the Institute of Directors, said: "We are still looking for further cuts if we really want to avoid recession."

John Monks, the TUC general secretary, said the Bank had woken up to the plight of British exporters but warned: "Similar cuts are still likely to be necessary in the months ahead if we are to head off the dangers of recession next year."

Ken Jackson, general secretary of the AEEU engineering union, said the half-point cut was not enough to undo the damage the MPC had inflicted by raising rates even though a downturn was looming.

Malcolm Bruce, the Liberal Democrats' economic spokes-man, said further rate cuts were needed "to protect the hundreds of thousands of jobs at risk in manufacturing industry." Although Labour MPs were relieved by the Bank's surprise decision, some remained doubtful the economy would revive as quickly as Mr Brown predicts.

In a statement, the Bank said: "News about the international environment and prospects for domestic activity have led the committee to moderate its forecast for growth next year and to revise downwards its projection for inflation over the next two years."