Thursday February 5, 12:36 PM
Bank of England slashes rate to historic low 1.0%
By Roland Jackson
LONDON (AFP) - The Bank (NASDAQ: TBHS - news) of England said Thursday it had slashed its key lending rate by half a percentage point to a record low of 1.0 percent, as it battles falling inflation amid recession in Britain.
British interest rates remain at the lowest point since the bank was created in 1694 -- 315 years ago.
The decision, which was in line with expectations, came shortly before the European Central Bank was forecast to hold eurozone borrowing costs at 2.0 percent before a likely rate cut in March.
The BoE's so-called "repo" rate -- at which it lends cash to commercial banks -- had already stood at a record low 1.5 percent after the bank had shaved off the same amount last month.
The bank said in a statement that its monetary policy committee "judged that there remained a substantial risk of undershooting the 2.0 CPI (Consumer Prices Index) inflation target in the medium term at the existing level of Bank Rate.
"Accordingly, the committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.0 percent was warranted this month."
The BoE's chief task is to keep annual British inflation close to a 2.0-percent government-set target.
Policymakers are worried that a dramatic economic slowdown will push British inflation below target -- and could even herald deflation or prolonged falling prices.
In such circumstances, consumers tend to postpone spending -- dampening economic momentum -- in hopes that prices will slide even lower.
"The global economy is in the throes of a severe and synchronised downturn," the BoE said in its statement.
"Output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly.
"Business and household sentiment in many countries has deteriorated. The weakness of the global banking and financial system means that the supply of credit remains constrained."
Official data showed last month that the British economy sank into a deep recession in the second half of 2008, dragged down by the burgeoning global financial crisis.
British gross domestic product (GDP) shrank by 1.5 percent in the fourth quarter of 2008 after a contraction of 0.6 percent in the third. The fourth quarter figure was also the biggest fall in GDP since 1980.
So far, the relentless global credit crunch, which erupted in August 2007, has also dragged the United States, the eurozone and Japan into recession.
In reaction, the US Federal Reserve and the Bank of Japan have slashed their main interest rates to virtually zero.
For its part, the Bank of England has slashed rates for five months running from a level of 5.0 percent in October.
Figures published last month showed 12-month inflation sank to 3.1 percent in December from 4.1 percent in November as energy prices crumbled.
The International Monetary Fund (IMF) last week forecast that Britain would experience the worst economic slump of all top economies this year.
The IMF predicted world growth of 0.5 percent in 2009 -- the lowest rate since World War II -- slashing its prior estimate of 1.75 percent.
Turning to Britain, the IMF forecast that the nation's economy would suffer the most, with GDP activity contracting 2.8 percent this year, after 0.7 percent growth last year.
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