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The BBC's Jenny Scott
"The rate cut came as no surprise to the City"
 real 56k

The BBC's Andrew Verity
analyses the effect of the rate cut on savers
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Thursday, 10 May, 2001, 12:32 GMT 13:32 UK
UK trims rates 0.25%
Graph of Bank of England interest rate movements
The Bank of England: Worries over global slowdown hitting UK
The Bank of England has cut UK interest rates by a quarter point to 5.25%.

The move was widely expected and supported by most economists, who said there was little threat from inflation in the UK.

The lower interest rates are intended to stimulate economic growth, amid worries that economic weakness in the United States could turn into a global downturn and hit the UK as well.

So far, most economic indicators suggest that much of the domestic economy is thriving, although there is a slowdown in the UK's manufacturing sector.

A bigger surprise, though, came less than one hour later, when the European Central Bank announced it would cut rates by a quarter point as well - to 4.5%.

Business, unions welcome rate cut

The rate cut was welcomed by UK industry. David Sears, the deputy director of the British Chambers of Commerce, said the rate cut would "boost... confidence, and add further insulation against the US slowdown and the wider impact of foot and mouth."

John Monks, the general secretary of the Trades Union Congress, John Monks, described the cut as "a sensible insurance policy which will help protect the UK from any economic fallout from across the Atlantic".

Seconds after the Bank announced its decision, some of the UK's leading mortgage lenders, including Halifax and HSBC, announced they would cut their interest rates on mortgages.

In a statement, the Bank's rate setting body - the Monetary Policy Committee (MPC) - said it remained concerned about global economic slowdown.

"The world economic prospect has on balance continued to weaken," it said.

"The extent and duration of the slowdown remain uncertain."

Confidence falls

A surprise US rate cut last month - the fourth this year - had increased pressure on the MPC to follow suit, in an effort to keep the economy out of recession.

Figures released on Tuesday by the Confederation of British Industry (CBI) had shown UK business confidence continuing to fall sharply, adding to pressure for a cut.

The Bank of England had already cut interest rates twice in 2001, bringing the cost of borrowing down for homeowners and businesses from 6% at the start of the year to 5.5% in April.

The bank had earlier reduced rates, in reaction to a slowdown in the economy and the impact of the foot-and-mouth crisis.

'Not as weak'

Bank of England Governor Sir Edward George had said he would be willing to cut rates further if there was evidence of a continuing slowdown.

Inflation remains well below the government's 2.5% target, leaving room for further cuts.


We can look forward to a pick-up in US activity as we move, say, into next year

Sir Edward George
However, Sir Edward said this week he was "modestly optimistic" about the prospect of a US recovery, given the Federal Reserve's interest rate cuts.

Addressing the Swiss Institute of International Studies in Zurich earlier this week, Sir Edward said US figures had not on the whole been as weak as many commentators predicted.

On an optimistic view, therefore, "we can look forward to a pick-up in US activity as we move, say, into next year", he said.

At its April meeting, the nine-strong MPC had voted six-three in favour of a cut.

Three members of the committee had favoured a deeper cut - of 0.5% - than the 0.25% cut finally implemented.

Sir Edward has the casting vote if there is no majority.

Resisting another cut

Analysts said the Bank was likely to resist another rate cut at its meeting next month.

The MPC's meeting comes just before the general election.

The analysts said any decision to change interest rates then could be viewed as politically motivated - a charge the Bank would be keen to avoid.

This consideration might have encouraged some of the MPC's more hawkish members to vote in favour of a cut this time, they said.

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See also:

10 May 01 | Business
Eurozone rate cut surprise
10 May 01 | Business
UK rate cut on the cards
10 May 01 | Business
UK manufacturing slumps further
18 Apr 01 | Business
UK rates set to fall again
05 Apr 01 | Business
Bank of England cuts rates to 5.5%
05 Apr 01 | Business
Who's Who at the MPC
18 Apr 01 | Business
Q&A: Will UK rates now be cut?
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