The Bank of England made a shock 1.5 per cent cut in interest rates today to just 3 per cent, the lowest level in more than half a century, as it seeks to prevent Britain from sliding into a deep recession. That was the biggest official interest rate cut since the 1981 slump and completely wrong-footed analysts who had mostly been predicting a half-point reduction. Not one in 62 polled by Reuters had expected such a massive move.
The BoE said the economic outlook had got a lot worse and drastic action was now needed. Economists said more rate cuts would still follow and it was possible Britain could soon have rates the same level as in the United States - one per cent. "The MPC needs to keep cutting interest rates aggressively. I think that they will need to fall to one per cent," said Roger Bootle, economic adviser to Deloitte.
"Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan." Two-year bond yields fell to a record low below 2.5 per cent. The pound, already down about 20 per cent this year, fell but then rose after the rate verdict as investors bet the economy's growth prospects had improved.
The British economy shrank for the first time in 16 years in the third quarter and most economists expect further contraction through next year and only a small recovery in 2010, when Gordon Brown, the British prime minister, must call an election. The Swiss National Bank and European Central Bank also cut interest rates today as countries all around the globe try and cope. *Reuters