Page last updated at 17:18 GMT, Thursday, 8 January 2009

Interest rates hit all-time low

Historical interest rates

The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.

The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.

Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.

The Bank has now reduced rates four times from October's 5% level.

Explaining its decision, the Bank said the level of contraction in business activity had "increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year".

It added: "Surveys of retailers and reports from the Bank's regional agents imply that consumer spending has weakened."

Sit tight?

BBC economics editor Hugh Pym said the Bank was now being more cautious after the sharp cuts in interest rates in November and December.

"There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months," he said.

The moment the cut was announced

Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there.

"With survey data continuing to languish at record lows - manufacturing and services surveys in the past few days have confirmed that activity is falling sharply - we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months," she said.

Mortgage impact

Most mortgage customers with tracker deals will automatically have the cut in interest rates passed on to them by their bank or building society.

It's good news for anyone with a mortgage but for savers it's a nightmare
Lottie Davies

Customers with an average 150,000 repayment mortgage will see their monthly bill drop by 46.

Those tracker deal customers with a 250,000 mortgage will see their monthly payments drop by 76.

But those on standard variable rate deals must wait for a decision from their lender.

While Lloyds TSB, HSBC, HBOS, Nationwide, and Skipton Building Society have already said they will pass on some or all of the reduction, most of the other lenders are currently saying their rates are under review.

The pound, which has fallen in recent months, rose to a three-week high of 1.1198 euros following the rate cut, before slipping back slightly to close at 1.1077 euros. It ended slightly higher against the US dollar at $1.5176.

Societe Generale economist Brian Hilliard said the pound's recent sharp fall was likely to have played a part in the Bank's decision to cut rates by no more than 0.5 percentage points.

London shares closed almost unchanged following the Bank decision, with the FTSE 100 index ending down just 0.05% or 2 points at 4,505.

Redundancy woes

The latest cut in interest rates comes amid further signs that some firms are continuing to struggle.

Nissan said on Thursday that it is cutting 1,200 jobs, or a quarter of the workforce, at its Sunderland factory due to falling sales.

And the administrators of music, games and DVD chain Zavvi have closed 22 of the firm's stores with immediate effect, at a cost of 178 jobs.

It comes two days after the last remaining Woolworths shops closed their doors for the final time.

However, not all companies are struggling. Sainsbury's has reported its "best ever Christmas performance", saying sales rose 4.5% in the 13 weeks to 3 January compared with a year earlier.

Injecting money?

The Bank's latest rate reduction comes as the Treasury has denied reports it is planning to inject more money, a policy known as quantitative easing.

To avoid the risk of deflation, a central bank boosts the money supply
Done by writing out cheques to banks in exchange for assets, such as government bonds
The hope is that the banks then lend on this money to individuals and firms
The money supply is thus expanded
More complicated than simply printing more notes

A number of newspapers said the step was being considered once interest rates fell close to zero as a tactic to help both stimulate the economy and avoid deflation.

Treasury sources said that while the move had not been ruled out, it was not currently on the agenda.

Institute of Directors chief economist Graeme Leach said the MPC's apparent caution in not cutting rates further this month "highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy".

He added that there also seemed to be uncertainty over "whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money".

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