Bank of England cuts rates again

Published: February 05, 2009

This lunchtime the Bank of England announced a further reduction in the base lending rate to 1%. The announcement today means that the Bank of England has now set a record for the lowest ever base rate in its history twice this year. Lloyds TSB confirmed in advance of the announcement that whatever the cut was, it would pass this on in full to its small and medium business customers, and it is hoped that other banks and lending institutions will follow their lead.

The decision was not unexpected coming as it does after a spate of worrying news recently that has heightened concerns over the scale of the economic downturn gripping Britain. Official figures last month showed not only that the nation is in recession, but that GDP dropped by a massive 1.5% in the last quarter alone, taking the total shrinkage to in excess of 2% in the last six months. This was backed up last week by an announcement from the International Monetary Fund that the UK would be the worst hit of all this year.

There are many who are surprised that the cut was not greater, especially in light of recent figures showing the rapid rise in unemployment and subdued consumer spending. There are many who feel that ongoing expectation of monthly reductions actually does more harm than good, and that the Bank of England should either get on and make the final cut now, or announce that they have fallen as low as they are going. It may be that worries over the effect a greater cut would have had on the value of the pound have held the Monetary Policy Committee to a position of caution.

In coming to their decision, members of the MPC will have obviously have taken into account the contents of the Inflation Report due to be published next week. It is expected that it will confirm the view that inflation will fall significantly under its 2% target in near term, and will potentially not recover in the medium term. If cutting interest rates does not impact this for the better, it will mean that the Bank of England may have no option but to embark on a program of quantative easing, which is essentially printing money. The Bank of England are quite rightly reticent to take such drastic action, but it does raise the question as to whether Gordon Browns reference to a depression was quite as innocent as he maintains.