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UK interest rates slashed to 3% UK interest rates slashed to 3%
(about 1 hour later)
The Bank of England has made a shock one-and-a-half percentage point cut in UK interest rates to 3%, the lowest level since 1955.The Bank of England has made a shock one-and-a-half percentage point cut in UK interest rates to 3%, the lowest level since 1955.
The size of the cut - the most dramatic since 1981 - signals the Bank's concern the UK is heading for a long recession, the BBC's economics editor says.The size of the cut - the most dramatic since 1981 - signals the Bank's concern the UK is heading for a long recession, the BBC's economics editor says.
It follows an emergency cut in rates last month from 5% to 4.5%. Mortgage lenders are now under pressure to pass the cut on to borrowers.
However, banks are expected to take their time deciding whether to pass on the cut to mortgage holders and savers. But due to the unexpected size of the cut, most banks have not yet decided how much of it to pass on.
The cut was followed by the European Central Bank lowering its eurozone interest rates from 3.75% to 3.25%. "I think it's essential that the banks do pass on the benefit of lower interest rates to people and to businesses," Chancellor Alistair Darling said.
The interest rate cuts come as the IMF predicts that developed economies will contract for the whole of the coming year for the first time since World War Two. "Banks need to understand that they need to help their customers."
'Bigger than expected''Bigger than expected'
BBC economics editor Hugh Pym said: "The Bank of England is using terms like 'very marked deterioration in the outlook' and 'severe contraction'. The BBC's economics editor Hugh Pym said the Bank of England was clearly concerned about the possibility of a prolonged recession in the UK.
This was evident from the Bank's use of terms such as "very marked deterioration in the outlook" and "severe contraction", he said.
This cut... should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers Richard Lambert, CBI UK mortgage market in graphics'No rush' on mortgage costsBank of England statementSize of cut welcomedThis cut... should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers Richard Lambert, CBI UK mortgage market in graphics'No rush' on mortgage costsBank of England statementSize of cut welcomed
"It is clearly very concerned about the possibility of a prolonged recession in the UK. Shadow chancellor George Osborne said: "This is a shot in the arm for the economy, but it shows how sick the patient is."
"The risks of high inflation have now evaporated, and because the bank is worried that inflation will now fall well below its target, it has felt the need to come up with this cut, which is much bigger than expected." Traders on the London market were also concerned about the message the cut conveyed. As a result, the FTSE 100 share index closed down 5.6%, or 255 points at 4,275.7.
The FTSE 100 closed down 5.6%, or 255 points at 4,275.7, with traders concerned that the extent of the cut highlighted the depth of the recession to come. The UK cut was followed by a less dramatic move from the European Central Bank, which lowered eurozone interest rates from 3.75% to 3.25%, to try to boost economic growth in the region.
What's more, the global financial body the IMF sharply revised down its forecasts for economic growth around the world in 2009.
It predicted that developed economies as a whole would contract next year for the first time since World War Two.
Mortgage fearsMortgage fears
The hefty cut will reduce monthly repayments for those with tracker deals - an estimated 40% of mortgage holders - by about £134 on an average £150,000 mortgage.The hefty cut will reduce monthly repayments for those with tracker deals - an estimated 40% of mortgage holders - by about £134 on an average £150,000 mortgage.
The moment the announcement was made Chancellor Alistair Darling calls for banks to take action
There have been some concerns that a cut in the Bank of England's base rate might not be passed on to other borrowers. However, there have been concerns that a cut in the Bank of England's base rate might not be passed on to other borrowers.
Prime Minister Gordon Brown was asked about this problem in the House of Commons on Wednesday because Abbey had just raised its tracker mortgage rates for new customers.
"We want the banks and building societies to pass on the interest rate cuts to their mortgage holders," he said.
"What we've been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary."
Given the surprise level of the Bank rate cut, mortgage lenders will take their time to decide whether they will pass on cuts to variable rate mortgage holders, which account for 10% of total home loans, according to the Council of Mortgage Lenders.Given the surprise level of the Bank rate cut, mortgage lenders will take their time to decide whether they will pass on cuts to variable rate mortgage holders, which account for 10% of total home loans, according to the Council of Mortgage Lenders.
The major lenders said rates were "under review", however Lloyds TSB has promised to pass on the rate cut in full to its variable rate mortgage customers.The major lenders said rates were "under review", however Lloyds TSB has promised to pass on the rate cut in full to its variable rate mortgage customers.
The group, which also lends through Cheltenham & Gloucester, says its standard variable rate, currently 6.5%, will never be more than 2% above Bank of England base rate. The group, which also lends through Cheltenham & Gloucester, said its standard variable rate, currently 6.5%, would never be more than 2% above Bank of England base rate.
Customers on fixed-rate deals will see no change to their repayments until they come to remortgage. Customers on fixed-rate deals will see no change to their repayments until they come to the end of their current deal.
The cut is likely to hit savers who face a cut in the interest rates they receive from their deposits.The cut is likely to hit savers who face a cut in the interest rates they receive from their deposits.
'The right call''The right call'
The move has been broadly welcomed by business bodies and trade unions.The move has been broadly welcomed by business bodies and trade unions.
Richard Lambert, CBI director-general, said: "This is a bold and welcome move by the Monetary Policy Committee, and achieves what the CBI had been calling for."Richard Lambert, CBI director-general, said: "This is a bold and welcome move by the Monetary Policy Committee, and achieves what the CBI had been calling for."
He added: "This cut... should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers." He added: "This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers."
The TUC's head of economics Adam Lent said the move was "the right call".The TUC's head of economics Adam Lent said the move was "the right call".
"It shows the Bank now understands that the problem is recession not inflation.""It shows the Bank now understands that the problem is recession not inflation."
Meanwhile, the Institute of Directors (IoD) said interest rates could touch record lows of 2% or less by this time next year.Meanwhile, the Institute of Directors (IoD) said interest rates could touch record lows of 2% or less by this time next year.
"The sooner we get interest rates down the less is the risk of a long and deep recession," said IoD chief economist Graeme Leach."The sooner we get interest rates down the less is the risk of a long and deep recession," said IoD chief economist Graeme Leach.
Manufacturing declineManufacturing decline
The Bank of England's interest rate move came after a series of figures released this week provided further evidence that the UK economy is sliding towards recession.The Bank of England's interest rate move came after a series of figures released this week provided further evidence that the UK economy is sliding towards recession.
New figures from the Halifax showed house prices fell by another 2.2% in October, pushing the drop in house prices to 13.7% over the past year.New figures from the Halifax showed house prices fell by another 2.2% in October, pushing the drop in house prices to 13.7% over the past year.
Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row.Activity in the service sector, the backbone of the UK economy, shrank in October for the sixth month in a row.
According to an index compiled by the Chartered Institute of Purchase and Supply output from services was at its lowest level since its poll began in 1996.According to an index compiled by the Chartered Institute of Purchase and Supply output from services was at its lowest level since its poll began in 1996.
Also, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.Also, the Office for National Statistics said that manufacturing output fell for a seventh month in September - the longest run of monthly declines since 1980.
Manufacturing output fell by 0.8% in September, much worse than analysts' expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.Manufacturing output fell by 0.8% in September, much worse than analysts' expectations, making output 2.3% lower than a year earlier, the sharpest decline since May 2003.