UK interest rates cut

The Bank of England has cut its key UK interest rate by 0.25% to 5.75%.

It was the first cut for nearly two years and was immediately matched by mortgage rate cuts from some of the UK's biggest lenders.

Mortgage cuts
(variable rate)

Abbey: -0.25%
(7.49%)

Halifax: -0.24%
(to 7.5%)

HSBC: -0.25%
(6.5%)

NewWorld: -0.25%
(6.74%)

Northern Rock:
-0.29% (7.5%)

Virgin One: -0.25%

Abbey National, Halifax and HSBC were among the first to announce cuts to rates charged on standard variable mortgages.

A reduction of 0.25% in mortgage rates would reduce the cost of a typical £60,000 mortgage by £10 a month.

Nationwide Building Society, which cut its standard variable rate in December by 0.2% to 7.09%, and Bradford & Bingley said they had no plans to make an announcement on Thursday.

Slowdown

The Bank of England decision, announced at noon in London, followed the latest two day monthly meeting of the Bank of England's Monetary Policy Committee (MPC).

The cut, the first move in interest rates since February last year, was widely anticipated by analysts, who believed that the threat of a slowdown in the UK economy had risen sufficiently to warrant a reduction.

And it was welcomed by business leaders, who were disappointed that the Bank did not cut rates earlier in response to fears that the US economy, which is viewed as a key driver of global prosperity, might be slowing more quickly than expected.

"It's been a long time coming, but this decision will help reassure UK businesses and investors at a time of growing economic uncertainty," said Ian Fletcher, chief economist at the British Chambers of Commerce (BCC).

With manufacturers hit by the strength of sterling and still struggling to recover "this rate cut will help protect against the knock-on effects of weaker global demand on our economy", he said.

Union anger

But the cut received a mixed reception from union leaders, who have mounted vociferous protests against the Bank's refusal to cut rates last month.

A quarter of a teaspoon of medicine is not enough to cure the ills of UK manufacturing

Roger Lyons, MSF

Stephen Radley, of the Employers Engineering Federation, said: "The MPC's move will give a much needed boost to growth, confidence and investment."

But MSF general secretary Roger Lyons said: "A quarter of a teaspoon of medicine is not enough to cure the ills of UK manufacturing. It is the right medicine - it is just not enough.

Manufacturers, who shed 130,000 jobs last year, needed a more significant stimulus, he said.

"Thousands more manufacturing jobs will be lost this year as a result of the MPC's unnecessary caution. The MPC is failing to protect jobs in industry."

City reaction

The MPC's failure to produce an explanatory statement on Thursday gave analysts few clues to the reasoning behind the first cut for 20 months.

While the UK economy does appear to be in good shape, we could well be witnessing the calm before the storm

Ciaran Barr, Deutsche Bank

But the reduction had been widely expected after two cuts, totalling 1%, in US interest rates last month.

The US cuts were prompted by fears that the country's economy, the world's biggest, might be sliding into recession.

While the impact of the US slowdown elsewhere is as yet unclear, City analysts said that, with UK inflation having stood below its 2.5% target for almost two years, a cut in interest rates was unlikely to prompt economic instability.

"We would think the MPC has cut on benign inflation outlook and there may be some insurance against a further deterioration in the global background," said David Page at Investec.

Recent data has painted a mixed picture of the health of the UK economy, with overall growth slowing set against the fact that factories are continuing to increase output.

It was only by a majority of one that the nine MPC members voted against a rate cut last month.

Budget worries

Further clues of the MPC's thinking will emerge next week when the committee publishes its quarterly report on inflation

UK chancellor Gordon Brown: Budget plans

But analysts do not expect further rate cuts to be implemented in the near future, with the global economic picture still unclear, and with a UK Budget, expected to be the last before the country's next general election, in the pipeline.

UK chancellors have gained a reputation for using pre-election Budgets to unveil measures which give the short-term desire to please voters a higher priority than the economy's long term health.

The BCC's Ian Peters said: "There remains a danger that, should the chancellor play a predictable pre-election hand in the forthcoming Budget, inflationary consequences could result."

Future direction

Observers had a mixed opinion of the future direction of interest rates.

The EEF's Stephen Radley said: "This should be the first in a series of cuts provided the chancellor does not muddy the waters in next month's budget by stoking up consumer spending with unnecessary tax cuts."

But, in the City, Mark Ramsden of Stone & McCarthy said: "[The MPC] might hold off for a while before the next cut, partly because we see a gradual downturn in the UK data as the US fallout hits us, and that might take a few more months."

Richard Jeffrey, of Charterhouse Securities, who believes that Thursday's rat cut was not warranted by UK economic data, said: "I think it is very likely that [the cut] will have to be reversed later in the year."

On the London stock market, the FTSE 100 index of leading shares stood 13.4 points lower at 6212.2 at 1500 GMT.