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Interest rates hit all-time low Interest rates hit all-time low
(10 minutes later)
The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.
The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.
Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.
The Bank has now reduced rates four times from October's 5% level.The Bank has now reduced rates four times from October's 5% level.
Explaining its decision, the Bank said the level of contraction in business activity had "increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year".Explaining its decision, the Bank said the level of contraction in business activity had "increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year".
It added: "Surveys of retailers and reports from the Bank's regional agents imply that consumer spending has weakened."It added: "Surveys of retailers and reports from the Bank's regional agents imply that consumer spending has weakened."
'Why wait?''Why wait?'
"Whilst the Bank has indicated it wanted to take a measured approach to cutting rates, this is too timid to deal with the current situation," said EEF chief economist Steve Radley."Whilst the Bank has indicated it wanted to take a measured approach to cutting rates, this is too timid to deal with the current situation," said EEF chief economist Steve Radley.
QUANTITATIVE EASING To avoid the risk of deflation, a central bank boosts the money supplyDone by writing out cheques to banks in exchange for assets, such as government bondsThe hope is that the banks then lend on this money to individuals and firmsThe money supply is thus expandedMore complicated than simply printing more notes class="" href="/1/hi/business/7817801.stm">Bank statement in full Rates are now at their lowest level in the Bank's history
"Given the expectation that rates will be cut again, the question has to be asked - why wait?""Given the expectation that rates will be cut again, the question has to be asked - why wait?"
Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there.Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there.
"With survey data continuing to languish at record lows - manufacturing and services surveys in the past few days have confirmed that activity is falling sharply - we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months," she said."With survey data continuing to languish at record lows - manufacturing and services surveys in the past few days have confirmed that activity is falling sharply - we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months," she said.
Injecting money?
The Bank's latest rate reduction comes as the Treasury has denied reports it is planning to inject more money, a policy known as quantitative easing.The Bank's latest rate reduction comes as the Treasury has denied reports it is planning to inject more money, a policy known as quantitative easing.
QUANTITATIVE EASING To avoid the risk of deflation, a central bank boosts the money supplyDone by writing out cheques to banks in exchange for assets, such as government bondsThe hope is that the banks then lend on this money to individuals and firmsThe money supply is thus expandedMore complicated than simply printing more notes Bank statement in fullWould injecting additional money work?
A number of newspapers said the step was being considered once interest rates fell close to zero as a tactic to help both stimulate the economy and avoid deflation.A number of newspapers said the step was being considered once interest rates fell close to zero as a tactic to help both stimulate the economy and avoid deflation.
Treasury sources said that while the move had not been ruled out, it was not currently on the agenda.Treasury sources said that while the move had not been ruled out, it was not currently on the agenda.
Institute of Directors chief economist Graeme Leach said the MPC's apparent caution in not cutting rates further this month "highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy".
He added that there also seemed to be uncertainty over "whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money".