The Bank's swift moves to lower interest rates, with five cuts in five months, will allow the Chancellor to use next month's Budget to present a reasonably upbeat outlook for the economy.
Mortgage lenders were swift to follow the Bank's move. The Halifax, Britain's biggest mortgage lender, cut its rate within minutes by 0.5 per cent to 6.95 per cent, bringing it down to its lowest level since 1966. The typical monthly payment on a pounds 100,000 interest-only mortgage has fallen from a peak of pounds 723 last summer to pounds 562. The Nationwide, the biggest mutual, cut its standard variable rate by the same amount, to 6.45 per cent.
Yesterday's announcement was seen by Treasury insiders as particularly reassuring to those inside and outside the Labour Party who feared that the Bank's monetary committee would sacrifice growth and jobs for the sake of lower inflation.
Although Labour MPs were worried that the Bank's move reflected its concern about the economy, cabinet ministers are increasingly confident that Britain will avoid recession and that the Government will reap political benefit from the sharp fall in rates.
One minister said that Gordon Brown now had a "unique opportunity" to emerge as a Labour chancellor who had steered the economy successfully through difficult waters.
Tony Blair said yesterday: "What we have been concerned to do, both by getting rid of the huge budget deficit and the programme for independence of the Bank of England, is to make sure we go into this difficult situation with stability in place." The fact that interest rates were now at such a low level "gives us a much better chance to come through any difficulties we have and to emerge far stronger for the future".
Business, unions and the City welcomed the announcement. But borrowing costs need to fall lower still, according to many in industry. "The Bank has probably avoided a full-blown recession, but the economy is still in a fragile state," said Ian Peters, deputy director-general of the British Chambers of Commerce.
The latest move was widely seen as a vindication of Mr Brown's decision to give the Bank of England responsibility for hitting the inflation target. "We are seeing the real benefit of an independent Bank of England," said Steven Bell, an economist at Deutsche Bank.
However, the Tories said the bigger-than-expected rate cut showed that no one believed the Government's forecasts for growth. "The Bank clearly thinks the economy is in a lot more trouble than Gordon Brown complacently predicts," Francis Maude, the shadow Chancellor, said.
Graham Mackenzie, director-general of the Engineering Employers' Federation, said the decision had come much too late for his industry. "The adverse differential between UK and European interest rates is not sustainable," he said. Britain has the highest interest rates among the world's leading industrial countries. European rates are expected to fall from their current 3 per cent, while the United States' are 4.75 per cent.
In its statement, the Bank said uncertain international prospects and subdued costs made the half-point reduction necessary to keep inflation near its 2.5 per cent target. The Bank is expected to report next week that inflation pressures have diminished.
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