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Tuesday, 18 February, 2003, 21:41 GMT
Surprise cut in UK interest rates
UK interest rate graph
The Bank of England has surprised City analysts by cutting interest rates by one quarter of a percentage point.

After 14 months on hold, rates have been cut to 3.75%, taking borrowing costs to their lowest level since 1955.

It is a sign of how worried they are about the economy

The move surprised City analysts, who had thought that the Bank would maintain rates at 4% to keep a lid on the housing market and general inflation.

House prices last month were 24.9% higher than in January 2002, Halifax, the UK's biggest mortgage lender, said on Wednesday.

But the Bank warned of a gloomier economic outlook.

"Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated," a Bank statement said.

While inflation was, at 2.7%, a "little above target", the Bank attributed the rise to temporary factors.

The cut would help keep inflation "on track", Thursday's statement added.

In Frankfurt, the European Central Bank left the key interest rate for eurozone countries on hold at 2.75%.

Cut to mortgage rates?

The cut prompted lender One, formerly Virgin One, to reduce its headline mortgage rate, with rivals such as Halifax, HSBC and Nationwide yet to decide whether to follow suit.

But the cut heralded bad news for shareholders, raised fears of higher inflation and sending stocks lower.

There are signs that the UK economy is weakening

Ian McCafferty

"This is one of the biggest gambles any central banks has done - cutting rates when house price inflation is close to 30% and inflation is already above target," said John Butler, UK economist at HSBC.

"It is true to say [the Bank is] playing with fire."

Ross Walker, UK economist at Royal Bank of Scotland, said: "I can see nothing in the data that suggests the UK consumer needs further interest rate easing."

But Simon Rubinsohn, chief economist at fund manager Gerrard, said the cut, while "surprising", was "warranted".

"With the exception of the house price indices... most other recent pieces of economic news have been downbeat at best," Mr Rubinsohn said.

"Manufacturing appears to be sliding back into recession... the consumer is turning more cautious and the non-retail service sector is coming under greater pressure."

The benchmark FTSE 100 share index closed down 81.7 points at 3,597.0.

Business reaction

The Bank decision was also welcomed by business groups including the Confederation of British Industry which, signally, had failed to join calls for the cut.

Eurozone rates
The European Central Bank, led by Wim Duisenberg, decided to keep rates on hold
"There are signs that the UK economy is weakening," said CBI chief economist, Ian McCafferty.

"Retail sales growth is slowing and recent stock market falls have dented business and consumer confidence."

Ruth Lea, policy head at the Institute of Directors, said: "There is no doubt that economic clouds are gathering.

"A possible war with Iraq is draining confidence and the markets are very jittery and bearish."

The Bank gained particular applause from the UK's long-suffering manufacturers.

"In the midst of such uncertainty manufacturers will breathe a sigh of relief that the [Bank] stands ready to do all it can to shelter the economy from the gathering storm clouds," said Stephen Radley, chief economist at the Engineering Employers Federation.

Here are a selection of your comments on this subject.

As a chartered surveyor in residential surveying, I'm very much afraid that instead of a much-needed gentle slowdown in the market we shall now have a short continuation of the present unsustainable boom followed by a re-run of the entire 1990s as the lenders sadly learnt nothing from that period. If only they would give the benefit of any base rate changes to their savers rather than their borrowers the country might be in a stronger economic position.
Ted, England

Fantastic. It's already hard enough to afford a house as it is - this will mean that people can afford to borrow more and so house prices could easily go up as people attempt to cash in. Did it really only take Labour to ruin our economy in 5 years - or was this going to happen no matter what they did?
Duncan, UK

This is certainly not good news

Jonathan Lewis, Wales
This is certainly not good news for savers and will further lower the interest rate return. There seems to be little evidence to support the cut in interest rates announced by the Bank of England today.
Jonathan Lewis, Wales, U.K.

This is the worst thing the BOE could have done! Lending is out of control, as is the housing market. It seems the bank will not be happy til everyone has debts up to their eyeballs and can spend no more on the high street. Sure this is good for industry, but unless you have a variable rate mortgage, or high debts... Sorry you lose. Your savings are worth less, as are your investments and pensions.
Anthony Collins, UK

This is bad news. Stocks, shares, endowments and pensions are sliding into oblivion. Lowering the interest rates like this will damage everyone's future.
Paul, UK

The BBC's Jenny Scott
"A bold move by the Bank of England"
Ian Brinkley, Senior Economist, TUC
"It's a very welcome move indeed"
David Ellis, editor of Moneywise magazine
"There's nowhere you're going to put your money that's going to generate almost any amount of interest"
See also:

06 Feb 03 | Business
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