Bank Slashes Rates To Historic Low
The Bank of England today ordered a further, drastic one percentage point cut in interest rates to 2 per cent, a historic low not seen since November 1951.
The radical action by the Bank’s rate-setting Monetary Policy Committee (MPC) followed hard on the heels of last month’s surprise 1.5 percentage point rate cut that reduced rates to a 54-year low of 3 per cent.
The latest move came as the nine-member MPC stepped up its newly aggressive campaign to stave off the threat of a severe and prolonged recession.
After facing a barrage of attacks, accusing it of previously moving too slowly to stem the slump in the economy, the Bank has, over the past month, decisively switched tactics in response to a swift and severe worsening in the economic outlook.
Mervyn King, the Bank’s Governor, pledged last week that: “We will take whatever action is required to steer the economy back into calmer waters.”
Central banks around the world have also cut interest rates this week.
Sweden's central ban today cut its key rate by a record 175 basis points, to 2 per cent, the third reduction since October and the biggest since 1992.
New Zealand also announced a record cut of 150 basis points, bringing its rate down to a five-year low of 5 per cent and acknowledging that further cuts would probably be necessary. Indonesia made a surprise 25 basis-point cut to its rate, which takes the interest rate to 9.25 per cent.
Yesterday, the Bank of Thailand cut rates by 100 basis points to 2.75 per cent, partly in response to the recent political turmoil during which the Prime Minister was forced out of office.
The Reserve Bank of Australia surprised with a larger-than-anticipated 100 basis-point cut to 4.25 per cent on Tuesday.
Pressure on the MPC to follow last month’s steep reduction in Bank rate with another swingeing cut mounted this week after another spate of dire figures that suggested that the economy is shrinking at an accelerating pace as recession tightens its grip.
The Reserve Bank of Australia surprised with a larger-than-anticipated 100 basis-point cut to 4.25 per cent on Tuesday.
Pressure on the MPC to follow last month’s steep reduction in Bank rate with another swingeing reduction mounted this week after another spate of dire figures that suggested that the economy is shrinking at an accelerating pace as recession tightens its grip.
Key surveys of manufacturing and services industries, that are monitored closely by the Bank, have suggested that both sectors are contracting at the fastest pace in at least a decade.
Fears over a vicious downturn driven by a slump in consumer demand have intensified after figures revealing that household spending fell for a second quarter in a row in the three months to September, and registered its sharpest drop since the start of 1995.
Anxieties have been fuelled by sharp rises in unemployment and a wave of big jobs cuts across swaths of the economy.
At the same time, extra manoeuvring room for the Bank to cut interest rates to all-time lows was created as inflation tumbled from recent record highs. Headline inflation on the MPC’s benchmark consumer price index dropped to 4.5 per cent in October, from the previous month’s 16-year high of 5.2 per cent.
Despite applause from business leaders and the financial markets, today’s watershed MPC decision will raise serious concerns.
Economists argue that unprecedented rate cuts are justified as the credit drought inflicted by banks that are hoarding cash is sapping the strength of the economy.
But there are also big worries that the banks’ unwillingness to lend will make cuts in official base rates ineffective and the MPC powerless.
There is also alarm over the toll taken by record lows in interest rates on the value of the pound and the danger that, with rates at 2 per cent, the Bank is fast running out of room for further reductions since rates cannot fall below zero.
Concern over the plunge in the pound was inflamed yesterday as sterling plummeted again, with its overall value against a basket of rival currencies plumbing a 13-year low.
The pound is down by some 27 per cent against the dollar over the past 12 months.
Economists are divided over how concerned the Bank should be over the prospect of having only very limited scope to cut rates further.
Influential experts, such as Willem Buiter, a professor at the London School of Economics and former MPC member, had urged the Bank to take aggressive measures today to prevent the recession becoming worse than those endured in the early Nineties and early Eighties.
The Times MPC, an independent panel of economic and financial experts, also recommended that the Bank cut base rates by 1 per cent today, although two of its nine members urged greater caution and called for only a quarter point reduction or no cut at all.
City analysts point out that, even if interest rates fall to zero, the Bank can resort to other, more radical measures to breathe life into the economy; for example by injecting liquidity by buying government or corporate bonds.
