Bank springs rate surprise with half-point cut to 5.5%

THE BANK of England's decision to cut interest rates to their lowest level since 1994 with an unexpectedly big fall of 0.5 percentage points set City pulses racing yesterday afternoon. But an initial surge in share prices and fall in the pound were later reversed as the markets absorbed the implications.

The FTSE 100 index ended 0.4 points lower at 5,939.9 after earlier gaining more than 100 points. The pound ended little changed at 68.9p to the euro.

The half-point cut to 5.5 per cent was welcomed as a sign that the Monetary Policy Committee was ready to act swiftly if necessary. Kate Barker, Confederation of British Industry chief economic adviser, said: "This decisive move is good news for industry at a time when trading is difficult in many sectors."

Mortgage lenders greeted the move as a pleasant surprise. Jim Chadwick, marketing director for Barclays Mortgages, said: "Recent rate cuts appear to have had a positive effect on consumer confidence."

Most lenders cut mortgage rates by half a point, taking the monthly payment on a pounds 100,000 interest-only mortgage down by pounds 30. The fall in the typical repayment on this mortgage since rates peaked in the summer has been nearly pounds 152. Savings rates are under review and are likely to be cut again.

Business and unions again reacted to a fall in borrowing costs by demanding another. John Monks, general secretary of the Trades Union Congress, said: "The Bank needs to continue the downward trend next month in order to avoid recession and secure recovery in 2000."

The Bank's statement linked yesterday's move to the inflation forecast to be published in next week's Inflation Report. It said: "The Committee's latest inflation projections implied that a further reduction in interest rates was necessary to keep inflation on a path consistent with the target of 2.5 per cent."

Since the November report evidence on growth has been mixed, but inflation signs have been good. The Bank's statement was not read as a strong hint at future rate moves.

City analysts remained divided about the outlook for the economy after the fifth rate cut in five months. "The lags are such that the Bank cannot do anything now to avert a recession," said Steven Bell, UK economist at Deutsche Bank. He predicted that the next few months would bring bad news on the economy, including an upturn in unemployment.

However, Neil Parker at Royal Bank of Scotland said the economy remained in good shape. He said: "This move seems to show some complacency on the part of the MPC about the inflation target. Some degree of caution is now needed or the Bank risks destabilising the economy."

Most analysts expect UK interest rates to fall to 5 per cent by summer, taking them closer to mainland European levels.

The European Central Bank yesterday kept interest rates on the Continent unchanged, despite growing signs of slowdown in the euro zone. Wim Duisenberg, ECB President, said there was "no significant upward or downward pressure on prices".

However, the ECB President indicated that benchmark European interest rates could fall below their current level of 3 per cent in coming months. He said: "Recent data seem to confirm our earlier assessment that there are downside risks for upward growth and that production may have slowed down around the turn of the year".

Mr Duisenberg emphasised that the level of the euro - which has declined to $1.13 from $1.16 at launch - was not yet a matter for concern. The ECB would intervene to stabilise the currency if it was "seriously out of line with fundamentals".

Analysts said there was no chance of a further ECB rate cut until the euro strengthened.

Outlook, page 19

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test