The Bank of England yesterday trimmed its key lending rate by a full percentage point to 2% � the lowest level since 1951 � in a bold move to shore up Britain�s crumbling economy.
The Bank of England yesterday trimmed its key lending rate by a full percentage point to 2% - the lowest level since 1951 - in a bold move to shore up Britain's crumbling economy.
City economists and trades union leaders welcomed the cut in the cost of borrowing but it sent the pound tumbling further on the foreign exchange markets.
The move by the nine- member Monetary Policy Committee follows a decision last month to cut the key lending rate by an unexpectedly large 1.5 percentage points to 3%.
But recent economic confidence data offered no sign that the November move helped buoy activity or sentiment across the manufacturing or services sectors, economists noted.
Analysts had widely expected the move, following business indicators suggesting the economy could be heading for an even deeper recession than most people had predicted.
Amid a global credit squeeze, banks have clamped down on lending, hitting Britain's highly-indebted economy hard. House prices have fallen by around 18% from last year's peak, unemployment is soaring and consumer confidence has taken a dive.
The UK economy shrank in the third quarter for the first time since the recession of the early 1990s and analysts expect the pain to intensify into next year.
Brendan Barber, general secretary of the Trades Union Congress, backed the hefty cut. He said: "This decision was spot on. The Bank of England could not be clearer about what it expects the high street banks to do.
"The government must now pull every lever of influence to get banks lending. If that doesn't work, radical measures will be needed straight away. The alternative is a wave of bankruptcy and redundancy."
Ian McCafferty, the chief economic adviser at the Confederation of British Industry, the leading employers' group, said: "The economy needs a significant monetary stimulus and the Bank has clearly decided this will be best achieved by another big cut in interest rates.
"What is critical for business and consumers alike is that this reduction is passed on."
He added: "The economy is stalling, inflation is expected to undershoot the Bank's own target and the headline RPI rate of inflation is likely to turn negative for at least a few months in 2009. We need to see lending improve and to keep business working."
Scottish housing officials and the Scottish Council for Development and Industry also welcomed the action to cut rates.
Bank of Scotland said its business customers whose borrowings are linked to the base rate will receive the full benefit of the rate cut.
Pressure for a cut had been growing for several days. The British Chambers of Commerce and Engineering Employers Association had both appealed for a full percentage point off rates while John Hawksworth, head of macroeconomics at Price-waterhouseCoopers, had urged the nine-member MPC to cut by 1.5 points to 1.5%.
The latest cut represents a victory for MPC member David Blanchflower, who spent all this year urging his colleagues to cut rates sharply because of the danger of recession. His colleagues preferred to leave rates high, however, as they were focused on squeezing inflationary pressures out of the economy.
Meanwhile, interest rates on three-month dollar loans between banks fell for the third day running, The rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - inched down by nearly 0.01 percentage points to 2.19%, according to the British Bankers' Association.
The rate for three-month loans in euros - known as the European Interbank Offered Rate, or Euribor - decreased around 0.07 percentage points to 3.68%, its lowest level since January 2007. The equivalent rate for pounds fell to 3.72% from 3.79%.
Interbank rates are important because they affect the cost of loans in the wider economy, for both businesses and individuals.
The economic picture is also bleak in the eurozone, where the European Central Bank yesterday followed the Bank of England and cut interest rates by a record 75 basis points to 2.5%. This was a bigger move than economists had forecast but in line with the predictions of financial market traders.
It is the biggest cut in the ECB's 10-year existence and is a step up from the two 50 basis-point cuts made since October.
It also suggests a change in tack by the bank, despite recent comments from top officials that bumper cuts would serve little purpose and could spark fear in financial markets.
Before the decision, opinions on how far the ECB would cut rates had been split, between those who thought it would stick to a tried-and-tested 50 basis-point cut and those who thought it would cut by a record 75 basis points or more.
