British interest rate hits 315-year low

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(Agencies)
Updated: 2009-01-09 10:54

LONDON – The Bank of England on Thursday cut its key lending rate by half a percentage point to 1.5 percent, the lowest level in its 315-year history, to ward off any threat of deflation in a sharp economic downturn.

A woman looks at adverts offering savings rates and current account services at a branch of the Alliance and Leicester bank in Bramhall, Manchester. The Bank of England on Thursday cut its key lending rate by half a percentage point to 1.5 percent, the lowest level in its 315-year history, to ward off any threat of deflation in a sharp economic downturn. [Agencies]

The decision left British borrowing costs at their lowest since formation of the Bank of England in 1694, reflecting the seriousness of a slowdown which has left the country on the brink of recession.

"The (monetary policy) committee judged that, looking through the volatility in inflation ... there remained a significant risk of undershooting the 2.0 CPI (consumer prices index) inflation target in the medium term at the existing level," the Bank of England (BoE) said in a statement.

The move reflected concern that inflation could fall toward zero while some economists fear Britain may even experience deflation -- a prolonged period of falling prices -- which on top of a looming recession, could strangle the economy.

"Accordingly, the committee concluded that a further reduction ... of 0.5 percentage points to 1.5 percent was necessary to meet the (inflation) target in the medium term."

The CPI rate fell to 4.1 percent in November from 4.5 percent in October, coming off a 16-year high of 5.2 percent in September as the economy has slumped and energy and food prices slide.

The Bank of England on Thursday said that the world economy appeared "to be undergoing an unusually sharp and synchronised downturn.

"Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time."

The central bank believes that Britain is already in recession although this will be confirmed officially only after growth data due later this month.

Britain's economy contracted by 0.6 percent in the three months to September compared with the previous quarter for the steepest drop since 1990.

Britain is not officially in recession, however, until it reports two quarters running of negative economic growth, or contraction.

The BoE has embarked on a policy of sharp rate-cutting since late last year, in line with the US Federal Reserve and European Central Bank (ECB), as the global economy grapples with its worst period since the 1930s Great Depression.

"Faced with increasingly dismal economic news the Bank has decided that record low interest rates are necessary to wrestle the economy from the throes of recession," Martin Slaney, head of derivatives at GFT, said Thursday following the BoE's latest policy decision.

"The size of the cut was widely expected and reflects the sheer glut of bad news across the board, from the housing market to manufacturing, services and on the high street.

"Despite the historical nature of the Bank's move, it is increasingly apparent that rate cuts alone may not be enough if they do not stimulate lending. We are now in uncharted economic territory," Slaney said.

According to a newspaper report on Thursday, the government was considering whether the BoE should expand money supply to boost lending and kick-start the economy.

The Times newspaper, which cited a senior government source, said British finance minister Alistair Darling and BoE governor Mervyn King were looking at introducing a policy of "quantitative easing."

Such an approach -- already adopted by the US Federal Reserve -- would allow the BoE to effectively print money to pump into the system and stimulate lending amid the ongoing worldwide financial crisis.

"We expect the Bank of England to cut interest rates again in February and to bring them down to a low of 0.25-0.50 percent in the second quarter," IHS Global Insight analyst Howard Archer said on Thursday.

"Indeed, it is very possible that they could come all the way down to zero.

"In addition, it seems ever more likely that the Bank of England will engage in some form of quantitative easing over the coming months, in tandem with the Treasury."

Meanwhile with Thursday's rate reduction less sharp that some analysts had expected, sterling rose back above 1.12 euros, having fallen to almost parity over the Christmas period.