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Last Updated: Thursday, 4 August 2005, 12:41 GMT 13:41 UK
Bank cuts interest rate to 4.5%
Bank of England rates graph
UK interest rates have been cut to 4.5% by the Bank of England's Monetary Policy Committee (MPC).

The MPC's decision at its 100th meeting had been widely expected. UK rates had been held at 4.75% since August 2004.

Experts had predicted the move in the face of concerns about slowing UK growth and consumer spending, and manufacturing moving into recession.

Business leaders said the Bank had made "the right decision" amid mounting evidence of a UK slowdown.

Easing the pressure

"This cut will be a catalyst for growth and will provide an essential boost to consumer and business confidence," Digby Jones, head of the Confederation of British Industry, said.

But the British Chambers of Commerce (BCC) called on the MPC to remain vigilant, warning that "the UK economic climate has worsened and we are facing new dangers".

This cut is a timely and proportionate response to an economic situation which is now flashing amber
Steve Radley, EEF

The UK economy has grown below trend for four successive quarters - its worst performance in more than a decade.

A slowdown on the High Street has put the brakes on growth, with year-on-year growth in the second quarter at 1.7% - its weakest rate since the first three months of 1993.

Cut 'timely'

The British Retail Consortium (BRC) added that the decision had been long overdue, but warned the change would take several months to feed through to the High Street.

"The cut... needs to be reinforced by further reductions over the next few months if the economy continues to slow down," BRC chief Kevin Hawkins warned.

INTEREST RATE GUIDE
How will the rate cut affect your mortgage and savings?

Manufacturing organisation the EEF said the move would give the Bank "breathing space" to assess the economy throughout the autumn.

"This cut is a timely and proportionate response to an economic situation which is now flashing amber and will reassure manufacturers that the Bank is prepared to take calm and measured action," said EEF chief economist Steve Radley.

However, the T&G union condemned the move as "too little, too late" saying that UK rates still remain double that of competitors in Europe, leaving UK companies at a disadvantage.

Good news, bad news

The cut is also good news for mortgage holders. The Halifax dropped its standard variable rate to 6.5% immediately after the news - leaving customers with an average mortgage of 80,000 12 better off a month.

On the downside, savers will not get as good a return. ING had already cut its interest rate from 5% to 4.75%on one of its savings products ahead of the Bank's move.

Looking ahead, analysts suggested the Bank could cut rates once more this year, but they warned that a rapid series of cuts would be unlikely due to the risk of re-igniting inflationary pressures.

Edward Menashy of brokers Charles Stanley suggested the MPC could make its move in November - a date that would coincide with the Bank's next quarterly inflation report.

Consumer price inflation hit 2% - the Treasury's target - in June and the Bank of England will be wary of pushing it any higher.

The Bank is also keen to keep a lid on consumer debt and does not want to undo its efforts to control the UK housing market.




BBC NEWS: VIDEO AND AUDIO
Consumer reactions to the interest rate cut



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