Bank of England slashes interest rates by 1.5% » Central Government » 24dash.com

The Bank of England today cut interest rates by 1.5% in its most dramatic attempt yet to rescue an economy on the brink of recession.

The unexpectedly large cut brings official interest rates to 3% and was immediately welcomed by business leaders.

The move from the Bank's Monetary Policy Committee (MPC) comes as the UK sinks further into economic gloom.

The rate cut is the biggest in the UK since a 2% cut in March 1981 - when the country was gripped by recession in the early years of Margaret Thatcher's government. It brings rates to their lowest level since 1955.

The Bank of England said it made the move because of the "substantial risk" of undershooting its 2% inflation target as a sharp recession looms.

"There has been a very marked deterioration in the outlook for economic activity at home and abroad.

"Since mid-September, the global banking system has experienced its most serious disruption for almost a century.

"While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time.

"As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries."

Its gloomy assessment added: "Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit.

"Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK's main export markets."

Business leaders and unions immediately welcomed the "very bold" move to cut rates by 1.5% although one group warned the Bank not to use up all its "bullets" too soon.

David Kern, economic adviser to the British Chambers of Commerce, said: "We support the MPC's decision to cut rates by more than analysts expected. But we believe the MPC should move much more steadily and deliberately and avoid too many lurches towards emergency measures.

"Emergency measures have the undesirable affect of unsettling the markets and undermine confidence. Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens."

Adam Lent, the TUC's head of economics said it was the "right call", adding: "It shows the Bank now understands that the problem is recession not inflation. This cut was precisely in line with the TUC's call.

"But the real challenge is to ensure that these cuts are passed on to both business and mortgage customers. Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving again.

"Unless the cost of credit comes down, there will be many avoidable job losses in sound businesses."

Graeme Leach, chief economist at the Institute of Directors said: "This is a bold and aggressive move by the MPC and just what the economy needs. The household savings ratio is close to zero and could spike upwards, business investment intentions have fallen off a cliff and the banks are unlikely to pass on the reduction in full.

"The reduction shows that the MPC think inflation is yesterday's story and deflation is the risk for tomorrow. We think interest rates could touch record lows of 2% or less by this time next year. The sooner we get interest rates down, the less is the risk of a long and deep recession."

CBI director general Richard Lambert said: "This is a bold and welcome move and achieves what the CBI had been calling for.

"Business and consumer confidence has been deteriorating sharply in recent months, and recession has replaced inflation as the major threat to the economy over the next year or two.

"This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers."

Federation of Small Businesses chairman John Wright also welcomed the cut, saying: "We called for a bold 1% cut and this unexpectedly large rate cut will make an enormous difference to small firms and will put money in people's pockets before Christmas. The cut amounts to a generous saving for small firms of £750 million on loans and overdrafts.

"But all this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit."