Industry welcomes surprise rate cut

Bank's quarter-point reduction could herald further downward moves, says CBI chief

Industry leaders and trade unions reacted with surprise and delight following yesterday's unexpected move by the Bank of England to cut interest rates.

But City economists warned that the Monetary Policy Committee could be taking one of the biggest gambles in years by trimming a quarter point off base rates to leave them at a 48-year low of 3.75 per cent.

Business and the City had been universal in forecasting that the MPC would keep the cost of borrowing unchanged at 4 per cent for the 15th month in a row ­ the longest period of rate stability since the 1960s.

But the Bank said that even though underlying inflation had moved a little above its 2.5 per cent target, it judged that the prospects for demand, both globally and domestically, were "somewhat weaker" than previously anticipated.

There was further evidence of the weakening in consumer demand yesterday in the shape of figures showing that new car sales fell by 9 per cent last month. Figures from the service sector also showed growth slowing to its weakest in a year.

Digby Jones, the director-general of the CBI, said: "There has been a lot of gloom around so a cut in interest rates is great news. A quarter-point cut won't change the world overnight but it is symbolic and a I hope it will stimulate business investment. The MPC clearly felt Britain's macroeconomic stability was strong enough to withstand a cut without fuelling a new boom in house prices or consumer spending.

"Who says this is the end of rate cuts? It may well be that the Bank decides to cut again in March or April."

Brendan Barber, the general secretary-elect of the TUC, described the Bank's move as "a prudent and sensible decision in the face of increasing global economic uncertainty".

Manufacturing industry lobby groups, which have been among the strongest advocates of lower rates, were especially pleased. The Engineering Employers' Federation said the Bank's decisive action was a recognition that the UK economy was finally weakening in the face of the battering it has taken from the global downturn.

Stephen Radley, the EEF's chief economist, said: "The warning signs are there for all to see. In the midst of such uncertainty, manufacturers will breathe a sigh of relief that the MPC stands ready to do all it can to shelter the economy from the gathering storm clouds."

But the reaction in the City was more nervous. The FTSE 100 index initially rallied on news of the surprise rate cut but then resumed its downwards path, ending 81.7 points lower at 3,597, down 2.2 per cent on the day. On the foreign exchanges, the pound also fell against both the dollar and the euro.

George Buckley of Deutsche Bank, one of the few City economists to have forecast a cut in rates, said: "Generally just the consumer is strong, there's very little else propping the economy up." Analysts also noted that consumer spending was likely to weaken when the increase in employees' national insurance contributions kicks in from April.

The Bank's action was in contrast to the stance taken by the European Central Bank, which chose to leave eurozone rates on hold at 2.75 per cent following its monthly meeting in Frankfurt. However, calls for a cut are growing there, particularly because of the parlous state of the German economy, the biggest in the eurozone.

The fragility of consumer demand was underlined by new figures showing that shop prices in Britain fell 1.43 per cent in January from December due to an increase in mark-downs in the January sales. The British Retail Consortium's monthly shop price index showed prices last month were up 0.99 per cent on January last year.

"Slowing demand and ever tightening margins mean that the retail sector's ability to create jobs and drive the economy is under threat," Bill Moyes, the BRC's director general, said.