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Tuesday, 18 September, 2001, 16:26 GMT 17:26 UK
UK rates cut to 1960s levels
Graph of interest rates
The Bank of England has cut interest rates to 4.75% from 5%, the lowest level since 1964.

The cut in UK rates had been widely expected, following reductions announced on Monday by the European Central Bank (ECB) and the US Federal Reserve in light of the terrorist attacks in the US the previous week.

It shows our resolution to maintain the conditions for stability and growth

Gordon Brown
At least seven central banks around the world have cut interest rates over the past week, in a co-ordinated effort to prevent a collapse in the global economy following the attacks.

And British Chancellor of the Exchequer Gordon Brown told BBC Radio 4's The World At One that the international co-operation demonstrated the resolution not to succumb to terrorism and to ensure security and growth.

But some observers have questioned whether the Bank of England's decision to respond to the international crisis, rather than simply concentrating on domestic inflation, is within the Bank's legal remit.

Not as sharp

The new UK interest rate, while the lowest for 37 years, compares with rates of 3.75% rate in the eurozone, and 3.0% in the US.

The UK cut was not as sharp as the half-a-percentage-point reductions ordered by both the ECB and the Federal Reserve.

And the move comes, unusually, between scheduled sessions of the Bank of England's monetary policy committee, which meets every month to decide on interest rates.

The next monthly meeting is scheduled for 4 October.

UK interest rate cuts have already been cut four times this year in order to inject some strength into the economy, particularly the manufacturing sector, which is in recession.

In a statement explaining the cuts, the Bank of England said that while it is was too soon to assess the scale of the impact of the attacks on the UK economy, the direction of that impact and the associated risks were clear.

Inflationary fears

Doubts over whether a UK interest rate cut was appropriate were raised when figures revealed earlier on Tuesday that inflation has risen much more sharply than expected.

A central bank would typically respond to higher inflation by increasing rates, thus quelling demand, and with it upward pressure on prices.

Up until this month's statistics, inflation had remained below the government's target and so cutting rates did not create inflationary fears.

But the underlying rate of inflation has now risen by 0.4% last month to 2.6%, just above the government's target level of 2.5%.

It is the first time that inflation has risen to above the target level for 28 months.

Many economists have dismissed the sharp rise as a blip, and say they are not concerned about the two-year outlook for inflation.

Stock market reaction

The stock markets failed to rally on the back of the decision to reduce rates, saying the cut was not deep enough.

"Everyone was hoping for a half-point cut this morning, so you can see there is disappointment and also some surprise at the timing of it," said one trader.

An hour after the interest rate cut was announced, the FTSE 100 index of leading blue chip shares was 109 points lower at 4,789, little changed from its level before the rate cut.

But the opening of the US stock market inspired the FTSE to claw back some of its losses to close 50 points lower at 4,849.

Passing the cuts on

There was a mixed reaction from British banks about whether the cut should be fed through to mortgage rates which are already at exceptionally low levels.

Abbey National took a stance and said earlier this month that it would not pass on further interest rate cuts to its mortgage rates in order to protect savers as well as their borrowers.

Cheltenham & Gloucester, Nationwide, HSBC, Egg and the Woolwich all said they were reviewing their mortgage rates following the cut in interest rates.

NatWest, Barclays and Royal Bank of Scotland said they will reduce their base rate to 4.75%. but had not yet made a decision on whether to pass the cut on to their mortgage customers, while Virgin One has already decided to feed the cut through.

The Council of Mortgage Lenders says that it would be "sensible" and a "helpful move" for the banks and building societies to pass the cuts onto consumers in order to underpin confidence and counter the risk of recession.

The BBC's Jenny Scott reports
"An unprecedented move"
Chancellor of the Exchequer, Gordon Brown
"What we have seen is decisive action around the world"
The BBC's Jeff Randall
"The Bank has been very cautious"
See also:

18 Sep 01 | Business
Jittery start for stock markets
22 Aug 01 | Business
UK economy's split widens
08 Aug 01 | Business
Bank predicts slower UK growth
17 Jul 01 | Business
UK inflation stays at two-year high
11 Jun 01 | Business
High costs squeeze manufacturers
06 Jun 01 | Business
UK rates kept on hold
16 May 01 | Business
Eurozone inflation climbs
16 May 01 | Business
UK inflation to remain low into 2002
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