Bank of England cuts interest rate by 0.5% to 1.5%

In the UK, business surveys suggested that the pace of contraction in activity increased during the fourth quarter of 2008 and that output was likely to continue to fall sharply during the first part of this year.

Surveys of retailers and reports from the Bank’s regional Agents implied that consumer spending had weakened, the Bank said. The outlook for business and residential investment had deteriorated. And the availability of credit to both households and businesses had tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector.

But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.

At its January meeting, the Committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed. Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate.

Accordingly, the Bank said that the Committee concluded a further reduction in Bank Rate of 0.5 percentage points to 1.5% was necessary to meet the target in the medium term.

Responding to today’s decision to reduce the Bank rate, Council of Mortgage Lenders director general, Michael Coogan said: “This cut is a double-edged sword for retail-based lenders. While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders’ ability to attract deposits and maintain the flow of mortgage lending in 2009.

“The market is still not functioning properly and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to today’s announcement.”

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