The Bank of England reduced British interest rates by 50 basis points from 6.75 per cent to 6.25 per cent yesterday, responding to the slowdown in the economy and the prospect of below-target inflation, writes Sebastian Taylor.

Although the financial markets had priced in a 0.25 per cent reduction, the Bank's monetary policy committee's decision to opt for a larger 0.5 of a percentage point cut caused little surprise, given the rate reductions in Europe and the US.

The reduction is the third in as many months and brings British rates down from their peak of 7.5 per cent during the summer when inflationary pressures were still considered to be strong. Since then, however, underlying year-on-year inflation has hit the government's 2.5 per cent target for three months in a row and the economic slowdown has diminished the prospects of a revival of inflationary pressures next year.