Bank of England cuts interest rate by 0.25% to 5.25%

The Bank of England has cut interest rates by 0.25%. The reduction, which brings the current base rate to 5.25%, was expected by many commentators and the markets and follows the previous reduction of 0.25% to 5.5% on 6 December 2007.

Over the past few months there have been growing calls for an interest rate cut. Among those bodies were urging the MPC to cut rates this month was the Chambers of Commerce.

In making its decision the Bank of England, considered the tightening credit conditions for UK households and businesses, a global slowdown and the continuing credit crunch as factors that could slow the economy.

Despite CPI inflation currently being 0.1% above its 2.0% target the Committee judged that a reduction in Bank Rate of 0.25 percentage points to 5.25% was necessary in the medium term.

The CBI welcomed the 0.25% cut and feels that it will help the economy. Ian McCafferty, CBI Chief Economic Adviser, said, “The Bank’s own forecast in November suggested that two rate cuts of 0.25% would be required to meet its inflation target in 2009, and today’s cut brings the base rate down towards a more neutral position. This should help ensure that there is a soft landing to the slowdown now underway."

The IOD sounded a more cautious note with Graeme Leach, Chief Economist at the Institute of Directors (IoD) saying, "Whilst there is no surprise at today's decision, businesses should not forget that we are heading into uncharted waters. The Bank of England is reducing interest rates just as inflation is about to head well above target. There is a clear assumption that the slowdown in the momentum of growth will ultimately outweigh the upward pressures on inflation. This may well prove correct, but we can't be absolutely sure and today's decision was a small gamble.”