Bank makes shock 1.5 percentage point cut
The Bank of England made a shock 1.5 percentage point cut in interest rates on Thursday to just 3 percent, their lowest level in more than half a century, as it seeks to prevent the country from sliding into a deep recession.
RBS profits up 9 percentThat was the biggest official interest rate cut since the 1981 slump and completely wrong-footed analysts who had mostly been predicting a half-point reduction. Not one in 62 polled by Reuters had expected such a massive move.
The Bank said the economic outlook had got a lot worse and drastic action was now needed. Economists said more rate cuts would still follow and it was possible Britain could soon have rates the same level as in the United States - one percent.
"The MPC needs to keep cutting interest rates aggressively. I think that they will need to fall to 1 percent," said Roger Bootle, an economic adviser for accountancy firm Deloitte.
"Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan."
Two-year bond yields fell to a record low below 2.5 percent. The pound, already down about 20 percent this year, fell but then rose after the rate verdict, as investors bet the economy's growth prospects had improved.
The economy shrank for the first time in 16 years in the third quarter and most economists expect further contraction through next year and only a small recovery in 2010, when Prime Minister Gordon Brown must call an election.
Economists polled by Reuters after the decision predict the Bank will cut rates by half a percentage point next month and again in the first three months of next year, taking rates to 2 percent by March.
COORDINATED CUTS?
The European Central Bank and Swiss National Bank also cut interest rates on Thursday as countries all around the globe try and cope with the fallout from the credit crisis that has felled some of the biggest financial institutions around the world.
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