Base rate cut by another 0.5%

The Bank of England has again cut interest rates, bringing base rate down to just 1.5%, its lowest level since the creation of the bank in 1694.

In a statement issued alongside the announcement the Bank highlighted several factors leading to its decision:

  • ´The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.´
  • ´…business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year.´ Retail surveys are equally gloomy, implying that ´consumer spending has weakened´ – as shown by the High Street trading statements (and failures).
  • ´..the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector.´ What the Bank has in mind is not stated, although this may mean government action, eg on loan guarantees.
  • ´Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.´. Across the Channel, first estimates suggest Eurozone CPI fell by 0.5% to 1.6% in January.
  • ´… looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing (2%) level of Bank Rate.´

The one bright spot the Bank held out was that ´the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth´. However, even that was hedged later on with the comment that ´the depreciation in sterling will boost the cost of imports´.

Duncan R Glassey
Senior Partner – Wealthflow LLP

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