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February 7, 2008

Base rate cut to 5.25%

by Gill Montia

Story link: Base rate cut to 5.25%

The Bank of England’s Monetary Policy Committee has reduced the base rate from 5.5% to 5.25%.

The move had been widely predicted, in response to a slowing economy and the US Federal Reserve’s decision to cut the cost of borrowing to 3% in January.

The Bank of England’s Governor, Mervyn King, had made it clear that the UK would not be following the lead of the US, so as to ensure that economic growth and inflationary pressures remain in balance.

In a statement accompanying the rate cut, the Bank said: “Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months.”

Adding: “The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target.”

However, some analysts are warning that economic conditions in the UK could deteriorate, forcing the Bank to cut interest rates further.

Andrew McLaughlin, chief economist at Royal Bank of Scotland, believes “economic headwinds are becoming stronger and a more aggressive policy response may yet be required.”

Some observers are concerned that today’s base rate cut will have a limited effect on the economy because not all mortgage lenders will pass the benefit on to homeowners. However, a number of leading lenders have pledged to pass on the cut.

 

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