Bank of England makes first rate cut in two years

The Bank of England made its first interest rate cut in two years yesterday to kick-start the slowing economy, but dampened hopes for further swift reductions.

In its 100th interest rate decision, the Bank's Monetary Policy Committee lowered its base rate by 25 basis points to 4.5 per cent.

The move had been widely expected in the City after a sharp slowdown in the economy, which grew at the slowest annual rate for 12 years in the second quarter. Moreover, four of the committee's nine members had already votedfor a rate reduction in July.

The statement accompanying the decision highlighted "subdued" output growth in the first half of the year and a slowdown in household spending and business investment.

While downside risks to economic growth remained, the Bank also noted "some signs of a pick-up in consumer spending" and a potential boost to activity from rising equity prices and the recent fall in sterling.

Analysts said the comments signalled another rate cut was probably some way off - possibly not until next year. Short-sterling interest-rate futures rose modestly after the decision as traders bet rates could be cut again, though probably not until late this year.

The rate cut marked the first change in the cost of borrowing since August last year when the Bank completed a series of rate rises aimed at cooling the then soaring housing market and runaway consumer boom. It was the first reduction in rates since July 2003.

The MPC judged that while higher oil prices, which are trading near record highs, could raise inflation in the short term, beyond that "the slackening in the pressure of demand on supply capacity should lead to some moderation in inflation."

John Butler, at HSBC, said: "Overall the MPC statement presented the move as 'insurance' rather than opening the door to aggressive rate cuts. That is likely to be the theme of next week's inflation report."

The Bank will get a chance to explain its move in more detail when it presents its latest inflation and growth forecasts next Wednesday. Most analysts expect the outlook for growth to have worsened since the last set of forecasts in May, in part because of recent extensive revisions to past growth patterns.

While the housing market seems to be headed for a soft landing, rather than the crash predicted by the doom-mongers, consumer spending, previously the economy's main growth engine, has slowed sharply - with knock-on effects on Britain's major banks, which are all reporting big rises in bad debt provisions this week.

Manufacturing figures out today are expected to confirm that industry is, once again, in recession. Even the labour market, while still robust by historical standards, seems to be turning, with unemployment ticking up in recent months. Business organisations had long been clamouring for a rate reduction and welcomed yesterday's move.

The bombings in London during the last few hours of the MPC's 7 July meeting and a further failed attack two weeks later had also triggered calls for a rate cut to shore up confidence.

The Bank's statement made no mention of the bombings. Halifax, the mortgage lender, cut its variable mortgage rate by 25 basis points to 6.5 per cent, effective from 1 September.

HSBC reduced its standard variable rate by a quarter point to 5.5 per cent, also from the beginning from September.

Other lenders have yet to change their mortgage rates. Nationwide Building Society said it would take a decision "in due course".

Separately, the European Central Bank kept its base interest rate unchanged at 2 per cent, where it has been stuck for more than two years, amid a number of business surveys which suggest conditions are improving.

Yesterday's rate cut marked the 17th time the Bank of England has reduced rates since it was given independence in May 1997, and ended the joint second-longest period of unchanged rates.

The reduction also means that the previous level of rates, at 4.75 per cent, was the lowest peak in a rate cycle since 1952.

- INDEPENDENT