Interest rate cut - latest reaction
Jan 8 2009 By nebusiness
THE Bank of England made history today by slashing interest rates to an all-time low of 1.5%.
Rate-setters cut borrowing costs from 2% to 1.5% - the lowest since the Bank was founded in 1694 - but disappointed those looking for an even bigger move to combat a worsening recession.
The Bank is attempting to offer relief to borrowers and businesses but mortgage customers have been warned not to expect lenders to pass on the cut in full.
But the cut in rates was lower than in the past two months as the ``substantial depreciation" of the pound gave it room to manoeuvre.
The Bank said the recent deep rate cuts and Government spending plans, the fall in sterling and lower inflation would "provide a considerable stimulus" to the economy as the year progressed.
Bill MacLeod, head of assurance at PricewaterhouseCoopers LLP in Newcastle, welcomed the cut.
He said: "The MPC has made the right decision for a weak UK economy by reducing interest rates further today. The tumble in interest rates over recent months will help the economy but, being realistic, this won’t be an immediate cure because interest rate changes take time to filter through into the economy.
"However, over the next twelve months we should expect to see this medicine take gradual effect and the UK economy to begin a period of recovery from 2010 onwards.
"There is still some room for manoeuvre and we could see a further cut in base rates to 1% within the next month or two. However, thereafter, the Bank of England may need to consider measures to boost the supply of money directly, for example by purchasing government bonds."
Sarah Green, regional director of CBI North East, predicted a "more gradualist" aproach to rate setting in the coming months.
She said: "Today’s more modest interest rate cut reflects the Bank’s recognition that interest rate reductions on their own cannot restore credit flows, the most important factor determining the prospects for the economy.
"However, this move to support business and consumer confidence will be welcomed.
"If credit flows can be restarted, the monetary stimulus now in the pipeline is significant, especially when the fall in the pound is taken into consideration. A more gradualist approach to rate setting is likely in the coming months."
Meanwhile John Mowbray, vice president of the North East Chamber of Commerce, said the cut would provide a much-needed boost to embattled businesses in the region.
“Recent cuts have taken rates down to unprecedented levels and banks must be helped and encouraged to pass these cuts on. We hope that these measures, along with recent steps taken by the Government, will be backed by further support for business as we approach Budget 2009.
“It is vital that the availability as well as the price of credit is addressed, and there must be continued effort to ensure banks are able and willing to lend to businesses.”
North East manufacturers expressed their disappointment at the decision to cut interest rates by only half a point today, given the wide range of data indicating the recession is gathering pace.
Tony Sarginson, regional manager at EEF, the manufacturers' organisation said:"This year was already going to be a serious challenge for manufacturers but all the indications are that the downturn is gathering pace at home and abroad.
"While the Bank has indicated it wanted to take a measured approach to cutting rates, this is too timid to deal with the current situation. Given the expectation that rates will be cut again the question has to be asked ‘why wait’?".
The Institute of directors said the decision did not change their view that interest rates will be pushed towards zero over the coming months.
North East representative Richard Elphick said: "Today’s decision doesn’t change our view that interest rates will be pushed towards zero over the coming months.
"The MPC’s cautious reduction highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy and also whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money.
"Record low interest rates, a sharp sterling devaluation and the reduction in VAT have combined with the Christmas period to encourage the Bank to hold back from a deeper cut for the time being".
