UK Interest Rates Dropped, New Low Record in 315 Year History
Thursday, January 8, 2009, The Bank of England cut official interest rates by a half a percentage point to 1.5 percent, the lowest level in its 315-year history as it attempts to ward off a prolonged recession.
The bank’s nine-member monetary policy committee said the world economy “appears to be undergoing an unusually sharp and synchronized downturn.”
“Measures of business and consumer confidence have fallen markedly,” it said in a statement accompanying its choice. Inflation, meanwhile, is expected to fall from 4.1 percent currently to well below the government’s 2 percent target, heading toward destabilizing negative inflation.
“The Bank of England is now facing another balancing act,” said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club. Policy makers are now more worried about inflation falling below target or turning negative. Deflation, a sustained drop in prices, can be disastrous for an economy by discouraging people from spending as wages fall and unemployment rises.
The half a percentage point cut was less dramatic than the 1.5 percentage point trim it announced in November, and lower than the 1 percentage point cut expected by some economists – but still brings the rate down to the lowest level since the Bank of England was founded in 1694.
Yet whether the lower rates will have the desired impact of jump-starting the economy is debatable, as many banks and other lenders have been slow to pass on previous cuts.
Lower savings are unlikely to encourage consumer spending.
Meanwhile, Treasury chief Alistair Darling went to quash speculation that the government was plotting to print money to ease the impact of recession after he told the Financial Times in an interview published Wednesday that he was considering a policy of “quantitative easing.”
Prime Minister Gordon Brown has said that with interest rates close to zero, the government should take fiscal action, hinting at further tax cuts and increased government spending.
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