Cut in interest rates to boost economy

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The Independent Online

Industry leaders and homeowners were celebrating today after the Bank of England responded to calls for a cut in interest rates.

The quarter point reduction to 3.5per cent marks a dramatic start for new Bank of England Governor Mervyn King in his first meeting as chairman of the Monetary Policy Committee.

The MPC has adopted a "wait and see" approach on rates since March but it appears its patience over the pace of economic recovery snapped.

In a statement accompanying today's announcement, the MPC said the recovery remained "hesitant", adding that a cut had been necessary to keep inflation on track in the medium term.

Business groups praised the decision and said the action had been justified by the ailing state of the manufacturing sector.

Rates were already at a 48-year-low prior to today's announcement but are now the same as in January 1955. The decision could knock £12 a month off the cost of a standard £80,000 mortgage.

David Frost, director general of the British Chambers of Commerce, said: "The new Governor has started on the right foot.

"We applaud the Bank for seizing this opportunity to stimulate spending and investment.

"The business sector needs a boost - manufacturing continues shedding jobs and the service sector has also suffered a slowdown."

Today's announcement comes after data earlier this week showed the manufacturing sector remained in the mire, with output weakening in May. GDP growth also stuttered to just 0.1per cent in the first months of 2003.

Meanwhile, surveys have suggested that confidence among consumers has waned after high street demand had previously been key in propping up the UK economy.

And with the recent strength of sterling helping to remove the threat of inflation, many analysts believed the time was right for a cut.

Investec chief economist Philip Shaw said: "The MPC has recognised that inflationary pressures are few and far between.

"The cut in rates should help support the economy over the remainder of the year and ahead of the widely expected global recovery."

The Bank's move was also welcomed by the CBI, which praised the Bank for listening to the concerns of businesses.

CBI chief economist Ian McCafferty said: "The Bank's move will help support the economy, which has lost momentum this year."