UK cuts interest rates by 0.25%

A further quarter-point reduction in British "base rates" to 5.25 per cent was sanctioned yesterday by the Bank of England following the monthly two-day meeting of its monetary policy committee (MPC).

The move to lower interest rates came in response to signs of further weakness in industry order books, slower growth in wages and a fall in "core" inflation below the government's 2.5 per cent target.

At 5.25 per cent, British bank "base rates" are now at their lowest levels since 1994. Any further reduction would take rates down to levels last seen in 1977. The quarter-point reduction caused little surprise in the City where money markets had already priced in lower rates. But currency traders were wrong-footed by renewed strength of sterling against the euro and the dollar after the Bank's decision was announced. Sterling's upward move prompted a 0.21p decline in the euro to 67.25p sterling - ahead of the European Central Bank's interest rate decision - less than 0.6p above the euro's "low" since its new year introduction.

Sterling improved 0.7 pfennigs to 2.9026 deutschmarks, recovering losses ahead of the Bank's interest rate decision and closed up 1.52 US cents against the firm dollar at $1.6108. Renewed sterling vigour will have come as a disappointment to the Bank's MPC members as the relative strength of the British currency was a crucial factor in yesterday's decision to cut interest rates again. At current levels, the MPC believes sterling is significantly over-valued, by 10 per cent at least, with adverse consequences for manufacturing industry in domestic and export markets.

By lowering interest rates, the MPC will have expected sterling to lose some of its new "hard currency" status and take some of the pressure off automotive, engineering, textiles and clothing industries.

The MPC will be placed in a quandary if sterling remains resilient in the face of the reductions in interest rates.