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Bank of England cuts interest rate to a record 1.5%

It seeks to shore up Britain's recession-battered economy with the new rate, the lowest in the bank's 315-year history. But speculation is rife that rates may drop further next month.

January 09, 2009|Henry Chu

LONDON — The Bank of England slashed its benchmark interest rate to an all-time low Thursday in an aggressive bid to shore up an economy battered by recession and the global credit crunch.

The new rate of 1.5%, down half a percentage point, is the lowest in the bank's 315-year history. Even during the Great Depression, rates never dipped below 2%. The cut reflects just how grave the British central bank's directors believe the economic situation is, with the pound having plunged in value against other currencies and the specter of deflation hovering.

Interest rates in Britain have fallen 3.5 percentage points since October. Speculation is rife that they might drop further next month, moving closer to the zero rate adopted by the U.S. Federal Reserve.

Announcing Thursday's cut, the Bank of England said it was forced to act as economic growth continued to decelerate at an alarming pace and consumer gloom deepened.

"The world economy appears to be undergoing an unusually sharp and synchronized downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time," the bank said.

Britain has been hit especially hard by the global financial crisis because of London's role as an international banking and commercial center. Nationwide unemployment is at its highest in more than a decade, with nearly 2 million people out of work, and some of the country's best-known businesses have witnessed steep drops in sales or been forced into bankruptcy proceedings. This week Marks & Spencer, an iconic department store, announced that it would cut more than 1,000 jobs and close two dozen low-performing outlets.

The Bank of England hopes that its new rate will jar the credit market loose. In Britain as in the U.S., banks and other financial institutions have kept a tight hold on their money, refusing to lend to one another and to consumers for fear of not getting paid back.

British officials and private economists have expressed frustration over the banks' unwillingness to start lending again despite massive infusions of capital by the government as part of an $87-billion bailout unveiled in October.

"The real problem is not the cost of money," Norman Lamont, a former chancellor of the exchequer, told the BBC after the interest rate cut was announced. "It is the availability of money."

That has been a particular problem for small and medium-sized companies such as Dot Net Solutions, a software company based in Windsor, outside London.

With annual sales of $1.5 million and 23 employees, the firm grew by 40% last year. But it could have been by more if two banks had not declined to lend the company $150,000, said Dan Scarfe, the firm's chief executive and founder.

"They're judge and jury. I don't have someone I can appeal to. I just have to accept it," Scarfe said. "We're perfectly solvent . . . but we've just reached critical mass, and if we were to invest some money in the company, we could really put a good growth spike in our performance."

He will apply one more time to a different bank but harbors no great optimism that the latest reduction in interest rates will improve his prospects.

"If you can't get access to the loans, it doesn't matter what the interest rate is," he said. "None of these institutions has passed along these interest rates to us."

The British stock market also was unimpressed by the rate cut, closing slightly lower.

If the economy continues to slide sharply and deflation becomes more likely, the Bank of England will come under pressure to try more drastic measures to boost the monetary supply, either by injecting more cash into the system through various financial mechanisms or simply printing more money.

The government says it is not contemplating such a step at present.

"There is a debate to be had about what you do to support the economy as interest rates approach zero," Alistair Darling, chancellor of the exchequer, told reporters. But for now, he added, "nobody's talking about printing money."


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