The Bank of England joined other world central banks today in a coordinated cut in interest rates designed to ward off the threat of global recession.
The Bank, the US Federal Reserve and the European Central Bank all lopped half a point off their key interest rates in the first unscheduled rate moves since the aftermath of 9/11. Sweden, Canada and Switzerland made similar cuts. Australia reduced rates by a whole percentage point earlier this week.
Expectations of coordinated action had been growing in recent days, as the global financial crisis worsened, giving rise to fears that it could tip the world economy into a deep and prolonged slump.
Threadneedle Street cut its bank rate to 4.5%, the Fed to 1.5% and the ECB to 3.75%. It marked the biggest cut by the Bank of England since November 2001, and takes rates here to their lowest for two years. The MPC has now abandoned its rate-setting meeting so there will be no announcement tomorrow.
Simon Rubinsohn, chief economist at the Royal Insitution of Chartered Surveyors, said: “The dramatic response from the authorities is an appropriate response to the chaos in financial markets over the past few weeks and the global economy’s slide into recession. This should help to start the process of rebuilding confidence but we suspect that more action will be necessary over the coming months.”
Some economists have already said that the gravity of the crisis facing the British economy could see rates reduced to as low as 2.5%, which would be their lowest in over half a century.
Miles Templeman, director-general of the IoD said: “We welcome the coordinated monetary and fiscal response to the current crisis. However, we strongly believe that a further interest rate reduction of 50 basis points will be required next month, if not before.
“Inflation was yesterday’s story, recession is today’s story and deflation is tomorrow’s risk. Interest rates are heading in one direction – down.”
The central banks made a joint statment saying: “Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability.
“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.”
The Bank of England said the monetary policy committee believed that inflation in the UK would soon peak at 5%, and then start to fall. “Inflation is likely to rise further to above 5% in the next month or two, in large part as the full effects of already-announced increases in the price of domestic energy are felt. But inflation should then drop back, as the contribution from retail energy prices wanes, and the margin of spare capacity in the economy increases.”
The MPC said that cuts in interest rates alone “could not be expected to resolve the current problems in financial markets” and that they welcomed the government’s plan to recapitalise the major UK banks.