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Britain cuts interest rate from 4.5% to 3%

(Agencies)
Updated: 2008-11-07 06:41

LONDON -- The Bank of England (BOE) shocked the country and the rest of the world Thursday by slashing 1.5 percentage points off interest rates as part of its efforts to ward off an economic recession.

The highest cut (from 4.5 to 3 percent) since the BOE was granted independence in 1997 takes the rate to the lowest level in half a century.

The move is apparently in response to huge pressure from industry and unions to make a deep cut in rates.

The European Central Bank (ECB), too, cut its interest rate Thursday, reflecting worldwide concern over a deepening global recession.

But unlike the BOE, the ECB that covers 15 European countries met market expectations by cutting its rates by 0.5 percentage points, a move leaders hope will help stimulate economies and limit job losses.

"We face an extraordinary high degree of uncertainty," ECB President Jean-Claude Trichet said.

The ECB benchmark rate is now 3.25 percent. The 15-nation euro zone's economy, which had grown steadily since the bloc's creation in 1999, shrank by 0.2 percent in the second quarter of this year, and most economists expect it to contract further in the third.

The Swiss national bank also cut its rates, by 50 basis points, citing a deteriorating global outlook.

The UK's drastic rate cut has come as a surprise to many economists because most of them expected a 0.5 percentage point cut.

Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the British cut "astonishing".

Jonathan Loynes of Capital Economics called it "spectacular". "There is still more to do," Loynes said.

"At 3 percent, UK interest rates are still well above US ones when economic conditions suggest they should be as low if not lower ... Our view remains that UK rates will fall to 1 percent or below."