Interest rates slashed by a further 0.5%

Jan 9 2009 by Iain Laing, The Journal

INTEREST rates were cut to their lowest level ever yesterday as the Bank of England threw another lifeline to the UK’s ailing economy.

Borrowing costs fell by 0.5% to 1.5% – the lowest since the Bank was founded in 1694 – although some business leaders had wanted an even bigger cut as the prospect of a lengthy recession grows. The move will immediately benefit more than four million households with tracker mortgages but spells more misery for savers hit by the Bank’s drastic rate cuts since October.

The Bank’s Monetary Policy Committee (MPC) warned UK output was set to nose-dive further in early 2009 as the world economy suffered an "unusually sharp and synchronised" downturn.

Despite rates falling to a record low, businesses and homeowners are struggling as banks rein in lending to shore up their finances, hitting house prices and consumer confidence.

Experts said borrowing costs would fall further still to near zero in the coming months with the Bank forced to turn to other methods such as "quantitative easing" – boosting the money supply – to help the economy.

The rate reductions have come because the MPC’s mandate is to keep official inflation at 2%. The Bank said there was a "significant risk" of undershooting its target with rates at current levels.

Inflation is well above target at 4.1%, but will fall dramatically as prices tumble on lower demand in a recession, while moves such as the Government’s VAT cut add to the downward pressure.

The rate cut will knock £40 off monthly repayments on the average £150,000 mortgage, although borrowers have been warned that most lenders are unlikely to pass on the cut in full to those on standard variable rates.

Savers meanwhile have been punished as rates have fallen from 5% just three months ago. The average interest rate paid on an instant access account for £5,000 is currently 1.43%, down from 3.92% at the beginning of October.

Prime Minister Gordon Brown said: "The interest rate cut is an essential part of worldwide action that is now going to be taken to deal with this global financial crisis."

Shadow Chancellor George Osborne said the rate cut was "necessary" but called on the Government to help savers. He said: "These are people who did the right thing during the age of irresponsibility, they set aside money in the good years but now they are being punished by these cuts in rates."