British Central Bank Lowers Its Interest Rate to 1 Percent

A billboard at Bank of England headquarters in London reports the interest rate cut of a half-point, to 1 percent, a step taken because "the global economy is in the throes of a severe and synchronized downturn," the bank said.
A billboard at Bank of England headquarters in London reports the interest rate cut of a half-point, to 1 percent, a step taken because "the global economy is in the throes of a severe and synchronized downturn," the bank said. (By Sang Tan -- Associated Press)

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By Kevin Sullivan
Washington Post Foreign Service
Friday, February 6, 2009

LONDON, Feb. 5 -- The Bank of England cut interest rates from 1.5 percent to 1 percent Thursday in its latest effort to spur lending, while the European Central Bank decided to leave its benchmark rate unchanged at 2 percent.

The British central bank issued a statement explaining that its fifth rate cut since October was needed because "the global economy is in the throes of a severe and synchronized downturn."

"Credit conditions faced by companies and households have tightened further," the bank said. "The underlying picture for consumer spending appears weak. Businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding labor."

The cut was welcomed by the Confederation of British Industry, Britain's largest employers' group.

"This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy," Ian McCafferty, the confederation's chief economic adviser, said in a statement.

Others said falling interest rates were hurting people by reducing the interest they earn on their savings in the bank.

"The rate cut is an assault on savers who will have seen their interest payments drop by 83 percent since July 2007," Adrian Coles, director general of the Building Societies Association, said in a statement. "Savers dependent on interest income have not seen prices fall by a similar amount -- their lifestyles have taken a significant blow."

Some analysts also voiced skepticism that the bank's rate-cut strategy was effective in the face of Britain's worst recession since the early 1980s, which has led to record home repossessions and left nearly 2 million people unemployed -- the highest number since 1997.

"I felt the last interest rate cut had not very much point to it," Martin Weale of the National Institute of Economic and Social Research said this week.

Weale said the bank should concentrate more effort on buying up corporate debt to relieve pressure on an economy that his group predicted would shrink by 2.7 percent in 2009.

"I can't see any reason why conventional interest rate changes should be preferred to this sort of policy," Weale said.

Abhinay Muthoo, a professor of economics at Warwick University, called the Bank of England's move necessary to help restore public confidence but "not sufficient to kick-start the economy.


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