Bank rate lowest in its 315-year history
The Bank of England's fifth cut in a row brought interest rates to a new historic low today in the latest attempt to revive the economy.
The Bank reduced borrowing costs to 1 per cent - the lowest in its 315-year history - in its first meeting since the UK's slide into recession was confirmed.
While four million homeowners will see lower mortgage rates as a result of the move, savers - who vastly outnumber borrowers - face yet another knock to their already-dwindling returns.
The Building Societies Association (BSA), which had campaigned for unchanged rates, said the cut was an "assault on savers", who have now seen their interest payments drop by 83 per cent since July 2007.
Adrian Coles, BSA director general, said: "Today's decision means that people are less likely to save and the flow of funds into the mortgage market will be further disrupted."
Joe Harris, National Pensioners Convention (NPC) general secretary, said: "For the five million pensioners with savings, today's cut in interest rates will come as a further attack on their living standards."
The European Central Bank (ECB) meanwhile announced eurozone interest rates would remain at 2 per cent, pushing the pound up to a two-month high of 1.14 euros.
Mark O'Sullivan, trading director at Currencies Direct, said the boost reflected the fact that the pound has already "hit bottom" and investors' dismay at the ECB's reluctance to pull rates down further.
The Monetary Policy Committee (MPC) has reduced interest rates dramatically - from 5 per cent last October - as it tries to offer relief to borrowers and businesses amid a storm of bad news for the UK economy.
Since the last decision, it has emerged that the UK economy shrank by 1.5 per cent in the fourth quarter of last year - the biggest contraction in almost 30 years.
Unemployment has soared, with thousands of jobs being shed across the UK each week. January's figures showed jobless totals jumped by 131,000 in the three months to November to 1.92 million, the highest figure for more than a decade.
On top of this, the International Monetary Fund (IMF) has predicted that Britain will suffer more than any other advanced nation in the worst global recession since the Second World War.
The Bank of England today said the global economy was in the throes of "a severe and synchronised downturn".
"Credit conditions faced by companies and households have tightened further. The underlying picture for consumer spending appears weak," it said.
But it said previous rate cuts, combined with the weakness in the pound, would eventually have a "significant impact" on aiding the economy.
Until these feed through, however, policymakers judged there was "a substantial risk" of undershooting the Bank's 2 per cent inflation target had interest rates remained at 1.5 per cent.
The official measure of inflation, the Consumer Prices Index (CPI), plunged by the biggest amount since records began in December, down from 4.1 per cent to 3.1 per cent. It is set to fall well below target as recession bites and demand falls.
Business groups welcomed today's cut and predicted further reductions in the coming months.
David Kern, chief economist at the British Chambers of Commerce (BCC), said: "With the recession worsening, and deflation a distinct risk, there is still scope for further interest rate cuts in the next few months, to almost zero.
"But, with rates at very low levels already, the focus of UK monetary policy must now inevitably shift towards forceful quantitative and credit easing measures, with the aim of increasing the money supply and removing blockages in the credit markets."
So-called quantitative easing - increasing the supply of money in the economy to buy assets from banks - has been mooted by many economists as a possible tool to combat the recession as interest rates head to zero.
The Government's second bank rescue plan included a new £50 billion fund created for the Bank to use to buy up private sector assets to free up lending.
Stuart Porteous, head of RBS group economics, said: "The Bank is quickly running out of wriggle room on rates. Other weapons in the Bank's arsenal are now being readied for the offensive - buying assets first, printing money second."
Shadow chancellor George Osborne said: "The fall in interest rates is welcome and necessary, given the increasingly bad economic news.
"However, it will inevitably hit hard millions of savers and pensioners, who are the innocent victims of Gordon Brown's recession.
"That is why the Conservatives are calling for the tax on basic rate savers to be abolished and the tax free allowance for pensioners to be increased at the Budget."
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