Bank of England makes emergency rate cut

The Bank of England dramatically slashed interest rates by 0.5 per cent today along with central banks around the world in response to the global financial turmoil.

The snap decision by the Bank - a day earlier than expected - came as the Treasury announced a £50bn bail-out of the banking system.

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The Bank's half-point cut is the first such move since the aftermath of the 9/11 terror attacks in November 2001.

Meanwhile, the US Federal Reserve cut half percentage-point, as did the European Central Bank and Swiss, Canadian and Swedish central banks. In an attempt to stem unprecedented global market turmoil, the Fed cut its key federal funds lending rate by half a percentage point to 1.5 percent and also lowered its discount rate by the same amount to 1.75 per cent.

The ECB also cut by a half-point to 3.75 per cent.

China also joined the effort, cutting its key rate 27 basis points.

The Bank of Japan, with rates at just 0.5 per cent, did not ease but the Fed said the BOJ expressed its strong support for the coordinated policy action.

"Incoming economic data suggests that the pace of economic activity has slowed markedly in recent months," the Fed said in a statement.

"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed said that while inflation has been high, recent declines in energy and other commodity prices had tempered inflation risks.

It said the vote to cut US rates was unanimous and that inflation expectations appeared to be diminishing which could help support price stability.

"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said.

The BoE cut will mean a saving of £47 a month on a £150,000 mortgage if the reduction is passed on in full by lenders.

Economists said there would be more cuts to come.

Capital Economics' Julian Jessop said: "Today's co-ordinated half-point rate cuts from all the major central banks will provide at least a temporary boost to confidence but we fear that there is still a lot more work to do.

"For a start, the fact that the central banks have had to take such extreme measures underlines how bad market conditions have become."

The Bank welcomed the Government's rescue scheme today, adding that a "significant increase" in bank capital was also needed alongside lower rates to tackle the current problems in financial markets.

It has previously kept rates on hold at 5 per cent since April as policymakers worried about soaring oil, food and energy costs. Inflation reached 4.7 per cent in August, more than double the official 2 per cent target.

But the Bank added that, during the past month, inflation risks had shifted "decisively to the downside" - meaning that inflation could undershoot the target as prices fall in a recession.

Since the collapse of US investment bank Lehman Brothers on 15 September, there have been bail-outs and nationalisations on both sides of the Atlantic, including Bradford & Bingley in the UK.

London's FTSE 100 Index plunged to its biggest fall since Black Monday in 1987 this week as the turmoil spread through Europe, while interbank lending has all but ground to a halt, seizing up the financial system.

Official figures and surveys have also shown mounting economic gloom with manufacturing output declining for six months in a row for the first time since 1980.

Steve Radley, chief economist with the EEF manufacturers' organisation, said: "Manufacturers will welcome this bold and decisive move to arrest the current crisis and collapse in confidence.

"Coupled with the plan to shore up the financial system, today's co-ordinated moves should help arrest the potential slide into depression."

The UK's dominant services sector - accounting for almost three-quarters of the economy - also shrank at its fastest rate for more than 12 years last month, according to an industry survey last week.