- 07
- Nov
The Bank of England has made the biggest cut to the base rate of interest in its history in an attempt to stimulate economic recovery.
At its monthly meeting yesterday (November 6th), the Banks monetary policy committee (MPC) decided to reduce the base rate by 150 basis points, taking it to three per cent, its lowest ever level since the creation of the group in May 1997. Before yesterday, the lowest base rate witnessed under the MPCs command was 3.5 per cent. Following the decision, homeowners may well see mortgage rates start to drop, in addition to personal loan and credit card rates.
Explaining its decision to make its largest cut ever, the MPC said in a statement that the UK and global economy had experienced the most severe disruption to financial stability witnessed in nearly a century. It claimed that while the recent raft of measures to inject liquidity into the banking system and ease the burden on struggling consumers has gone some way to mitigate the effect of the financial collapse seen in September, it is likely that the resulting adverse economic conditions will remain prevalent for some time to come. It noted that as a result of the banking crisis, many consumers will have found it more difficult to obtain credit and loans as lenders have become decidedly risk averse. So too, the group noted that equity conditions in countries throughout the world have also declined sharply in the last two months.
The Bank went on to note that in the UK, figures indicate that the country is likely to enter a recession, with data showing that the economy contracted during the third quarter of this year. It noted that there have been substantial declines in consumer spending as shoppers have found their finances challenged by high bills as credit and loan availability dwindled. So too, both the residential and commercial property market was found to have declined, while the prospects for new business investment have also worsened considerably.
It continued: "Since the beginning of the year, the committee has set bank rate to balance two risks to the inflation outlook. The downside risk was that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulled inflation materially below the target. The upside risk was that above-target inflation persisted for a sustained period because of elevated inflation expectations. In recent weeks, the risks to inflation have shifted decisively to the downside. As a consequence, the committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target."
As such, it said that by reducing the base rate by such a degree, the UK should be able to avoid entering a period of negative inflation.
The move follows another historic cut made last month, when it slashed rates by 50 basis points a day ahead of schedule. This was the largest single cut made by the MPC. An announcement from the Bank followed a statement by chancellor Alistair Darling in which he called upon the MPC to consider the needs of Britons struggling during the downturn.
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