UK cuts a quarter point off interest rate as growth slows

The Bank of England yesterday cut its main interest rate for the first time in two years in response to slower economic growth…

The Bank of England yesterday cut its main interest rate for the first time in two years in response to slower economic growth. But it hinted that further early cuts were unlikely.

In a move analysts believed was aimed at boosting confidence among reluctant consumers, the bank's monetary policy committee (MPC) lowered the repo rate by a quarter point to 4.5 per cent.

The European Central Bank left its base interest rate unchanged at 2 per cent, where it has remained for more than two years, as surveys suggesting business conditions are improving backs its view that euro zone growth will gather momentum. The Bank of England said cutting its rates would ensure that it did not undershoot its inflation target, pointing out that sluggish consumer spending and business investment in the first half of the year had weighed on economic growth.

However, the MPC dashed hopes among business leaders that another cut was imminent.

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"Downside risks remain in the near term. Looking further ahead, however, the rise in equity prices and the recent fall in the exchange rate should boost activity," it said in a statement.

Andrew McLaughlin, chief economist at the Royal Bank of Scotland, said: "This move represents a bit of economic fine tuning on the MPC's behalf, with a view to shoring up domestic demand. Rates may fall further yet, but the committee will not be in any great hurry."

Investors in short-term sterling contracts, who had expected yesterday's move, continued to price in another rate cut by the end of the year, but opinions among analysts differed widely.

Banks and building societies moved swiftly to pass on the cut, which will reduce interest charges by £225 (€323) a year or £18.75 a month on the average mortgage, which is now £90,000.

The cut came exactly a year after the bank last raised the cost of borrowing in order to stop the then buoyant UK housing market overheating.

Recent data show that house prices have been almost unchanged since the start of the year, with annual inflation at nearly zero.

Sir Andrew Large, the bank's deputy governor, said last week that stagnant house prices could have dissuaded many people from spending their money on the high street.

UK business groups greeted the interest rate cut with relief, but urged the bank to consider more reductions later in the year.