Bank of England cuts Bank Rate by 50 bps to 1.0 per cent

05 February 2009

The Bank of England (BoE) today reduced its official Bank Rate - its third since November 2008 -  by 0.5 percentage points  to 1.0 per cent, bringing the interest rate paid on commercial bank reserves to an historic low of 1.0 per cent, in an attempt to stimulate the economy and stave off a deepening recession.

Earlier on 8 January, BoE had reduced the Bank Rate by a similar 0.5 percentage points to 1.5 per cent (See: Bank of England cuts its rate to record lows) The British central bank has been steadily reducing its key lending rate almost every month, beginning October last, when its key lending rate stood at 5.0 per cent.

In November it slashed rates by third by 150 basis points, bringing the official borrowing cost down from 4.5 per cent to 3.0 per cent - a significant move since the UK central bank has never cut interest rates by more than half a percentage point since it was made independent in 1997 (See: Bank of England slashes lending rates by a third).

Analysts were expecting BoE instead to inject billions into the economy through quantitative easing with the the global economy in the throes of a severe and synchronised downturn.

''Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly. Business and household sentiment in many countries has deteriorated. The weakness of the global banking and financial system means that the supply of credit remains constrained,'' BoE noted in a release.

''In the UK, output dropped sharply in the fourth quarter of 2008 and business surveys point to a similar rate of decline in the early part of this year,'' BoE said, adding, ''Credit conditions faced by companies and households have tightened further.''