Rates fall to lowest level since 1977

INTEREST RATES fell yesterday by a quarter of a point to 5 per cent - the lowest level since November 1977 and the seventh reduction in the past nine months.

In his Mansion House speech in the City of London last night, the Chancellor, Gordon Brown, warmly welcomed the announcement. He said the Bank of England's action was "decisive and timely", and had helped to keep the economy on a stable course.

Few mortgage lenders passed on the saving to their customers, however. Abbey National, Standard Life and Virgin Direct announced small cuts in mortgage rates but other lenders including the Halifax said they would not follow suit.

Rates of interest paid to savers have fallen faster than loan rates in recent months, as lenders have taken advantage of declining interest rates to boost their profit margins. Most banks and building societies also left mortgage rates unchanged in April, after the last quarter point interest- rate cut.

Although consumers will not feel the benefit, industry and unions welcomed the announcement by the Bank's monetary policy committee (MPC). John Monks, general secretary of the TUC, said: "The Bank has shown clear vision and foresight."

For the first time since the MPC started to cut rates last October, it did not face complaints that it had failed to do enough to help manufacturing industry counter the strong pound. Many City analysts believe interest rates will fall no further. Kate Barker, chief economist at the Confederation of British Industry, said: "It may now be right to leave rates on hold."

The Bank's statement said the MPC voted to reduce rates because it thought inflation was likely to undershoot the 2.5 per cent target. The persistent strength of the pound was almost certainly what swayed the vote. Weak exports have been holding back recovery in industry.

A spokeswoman for the Council of Mortgage Lenders said there was "no need to stimulate the mortgage market any further through mortgage rate cuts".

Rate cut surprise, page 20