UK cuts rates by quarter point

The Bank of England has cut UK interest rates by a further quarter point as it tries to stem the economic turbulence triggered by last month's terror attacks.

A quarter per cent cut represents more of a gentle nudge to the economy than the decisive push that business was seeking

Ian Fletcher, British Chambers of Commerce

It is the sixth time the Bank has cut rates this year, and leaves the UK base rate at 4.5% - its lowest level since 1964.

The Bank said early signs suggested the UK economy would not be as badly affected as the US following the attacks.

"But the weaker world outlook and increased uncertainty have set back UK business and consumer confidence, and may, for a time, restrain business and household spending" it said in a statement.

On Tuesday the US central bank, the Federal Reserve, implemented its second half-point rate cut since the atrocities, taking rates there to 2.5%.

Reaction

The Confederation of British Industry (CBI) welcomed the move saying the Bank had made "the right decision".

New standard variable mortgage rates

Halifax 5.5%

Nationwide 5.24%

Abbey National 6.5%

HSBC 5.25%

Virgin One 5.7%

Intelligent Finance 5.5%

First Direct 5.25%

But other business organisations gave a more muted response.

"A quarter per cent cut represents more of a gentle nudge to the economy than the decisive push that business was seeking," said Ian Fletcher, chief economist at the British Chambers of Commerce.

The Engineering Employers' Federation (EEF) also wanted the Bank to take more aggressive approach.

"We urge the Bank to continue to respond rapidly to further evidence of economic weakness and not to be distracted by the siren voices of inflation hawks" it said.

But in the City, some economists thought there was little need for rates to come down much further.

"We've seen a massive fiscal program being introduced in the US and I think that will pay dividends alongside the monetary easing that we're seeing in the US and Europe" said Simon Rubinsohn, chief economist at Gerrard.

"I'm not sure there's going to be overwhelming pressure to take rates much beyond 4.25%" he added.

The rate cut gave a boost to share prices and the FTSE 100 index broke back through the 5,000 level for the first time since the terrorist attacks in the US.

At the close of trading, the FTSE 100 was up 134.4 points at 5016.2.

UK banks trimmed the cost of mortgages following the decision, and some rates are now at their lowest levels since the 1950s.

Mixed picture

The Bank of England's Monetary Policy Committee (MPC) faced a tricky decision this time around, with several recent reports painting different pictures as to the health of the UK economy.

On Wednesday a survey showed the UK's service sector shrinking for the first time in two and half years.

This was a significant change as until now growth in the service sector had been offsetting the recession being experienced in manufacturing.

But on the same day a study by the CBI said retail sales grew at their fastest rate last month for five years.

The state of the housing market is also unclear.

On Wednesday a report from the Halifax bank found that house prices stalled last month.

But earlier in the week another survey from the Nationwide said prices jumped 2.8% in September, the highest monthly increase since June 1993.

Both the Halifax and the Nationwide, however, say they expect the house price rises to cool off in the coming months.

There was some speculation before the decision that the Bank may choose to leave rates alone this month, for fear of stoking inflationary pressures.

Inflation in the UK rose to 2.6% in August - above the Bank's target level of 2.5%.