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Bank of England cuts interest rate by 1.5%

The Bank of England's Monetary Policy Committee has taken the unprecedented step of cutting interest rates by 150 basis points in an attempt to fend off a recession in the UK. The surprise move reduces the cost of borrowing to 3pc from 4.5pc. The majority of economists had forecast a 50 basis points cut, although calls for a 100 basis points cut from business leaders and some economists grew louder over the past week.

It is the first time the Bank has cut rates by more than half a percentage point since gaining its independence in 1997 and is the biggest cut since March 1981, when the then chancellor Geoffrey Howe tried and failed to stop the UK falling into a bitter recession. Rates have not been as low as 3 per cent since 1955.

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club welcomed the move. "The Bank of England was right to cut interest rates by 100 basis points - anything less would have been a missed opportunity," she said.

Simon Hays, senior UK economist at Barclays, said that the MPC should have waited until the credit markets had recovered somewhat to make such a big cut because only then would the banks be likely to pass on rate cuts to consumers and businesses.

"You would get more bang for your buck if you go for larger cuts when credit markets have improved," he said.
The MPC has room to make more cuts because inflation is believed to have peaked, and UK rates are high compared with other countries including the US, were the equivalent rate is just 1pc.

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