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Thursday, October 8, 1998 Published at 15:37 GMT 16:37 UK

Business: The Economy

UK interest rates cut by 0.25%

The Monetary Policy Committee provides some light relief for UK industry

The Bank of England has announced a cut in interest rates by 0.25% - but the move has been criticised for being "too little, too late."

Ed Crooks reports on how the rate cut was received
The nine members of the bank's Monetary Policy Committee decided to reduce the base rate from 7.5% to 7.25% - the first rate cut since June 1996.

[ image: Eddie George, governor of the Bank of England, believes inflation is well in check]
Eddie George, governor of the Bank of England, believes inflation is well in check
In a statement the committee said that the international environment had deteriorated, which could drive inflation in the UK below 2.5%.

The bank's monetary policy experts also cited a decline in business and consumer confidence in the country.

The cut, which followed recent reductions in Japan, the United States, Canada and Spain, was not unexpected.

Rory Cellan-Jones gets the first reaction from the City
During the past months both employers and trade unions had repeatedly called on the Bank of England to urgently lower its rates to avoid a recession.

However, economic analysts warned that the a 0.25% reduction may be too small to stimulate a flagging UK and world economy.

London's stock market took a similar view, with share prices falling sharply immediately after the announcement.

The FTSE 100 share index eventually closed the day down 130.0 points at 4698.9.

'Too little, too late'

The British Chambers of Commerce (BCC) welcomed the decision as "a step in the right direction," but warned it could be "too little too late."

TUC Economist Bill Callaghan: not enough
Tim Melville-Ross, director general of the Insitute of Directors, said the Bank of England had been "over-cautious" and urged them to cut rates further.

"The state of the manufacturing sector really is very worrying and, with the rest of the economy slowing significantly, there are few inflationary pressures," he said.

Trade union leaders chimed in, saying the cut would not do enough to head off further job losses.

Roger Lyons, the general secretary of the Manufacturing Science and Finance Union, said: "The cut is too little and it is getting too late to save manufacturing jobs. Industry needs a much stronger signal than this half-hearted gesture."

[ image: MSF General Secretary Roger Lyons: 'Too little too late']
MSF General Secretary Roger Lyons: 'Too little too late'
The Tories also welcomed the cut but warned that further pain lay ahead for householders and businesses.

Shadow Chancellor Francis Maude said: "Gordon Brown's basic blunders on tax, savings, spending and business costs mean the downturn will be worse than it need have been."

But Prime Minister Tony Blair defended the cut and said: "You will always get a situation when people want more and want it more quickly.

"However the Bank of England has got to take the decision in the interest of the long term stability of the economy."

The cut was a difficult decision for Britain's central bank to make, because the country's economy is not moving at the same pace.

While manufacturing is already in recession, the service sector is still booming.

But high interest rates translate into a strong pound, and that is making British products expensive.

Many exporters have already warned that the strong pound has forced them to close production lines as demand from abroad has slackened.

The pound had already weakened against the German currency, the Deutschmark, in anticipation of a rate cut.

One pound bought around 2.75 DM on Thursday, as opposed to over 3DM earlier in the year.

Mortgage rates down

Millions of home owners however rejoiced as mortgage lenders have already begun to pass the rate cut on to their customers, resulting in lower mortgage payments.

The Nationwide building society immediately confirmed that it would cut its variable mortgage rate by 0.3% to 8.2%.

Other lenders like Barclay's, Halifax, Abbey National and Alliance & Leicester said they would cut their rates as well. However, some of them will delay the cut until November 1.

However what was good news for mortgage owners was bad news for savers who will be getting a lower return on their money as a result of the reduction.

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