The Bank of England (BoE) yesterday slashed its key lending rate by a record 1.5 percentage points to 3.0 percent — the lowest level in more than half a century — as Britain heads towards recession.
The European Central Bank also cut its key rate by half a percentage point to 3.25 percent, joining the Bank of England, Swiss and Czech central banks as they confront the looming recession.
The ECB announced the cut of half a percentage point from 3.75 percent yesterday shortly after the BoE lowered its key interest rate.
The Swiss National Bank has cut its key interest rate by half a percentage point to 2 percent, only its second reduction since March 2003. In Prague, the Czech Republic’s central bank cut its interest rate by three-quarters of a percentage point to 2.75 percent.
The BoE’s decision took markets by total surprise and left British borrowing costs at their lowest level since 1955 while the reduction was the biggest since March 1981 when they were slashed by two percent under a different regulatory framework.
“There has been a very marked deterioration in the outlook for economic activity at home and abroad,” the central bank said in a statement accompanying its shock move. “Moreover, commodity prices have fallen sharply.”
The BoE added that its decision was taken in light of there being a sharp fall in British inflation over the coming months. Since winning independence from the British government in 1997, the Bank of England’s Monetary Policy Committee (MPC) had only ever reduced borrowing costs by as much as 0.50 percentage points.
The huge cut follows a half-point reduction last month and completely took markets by surprise. Most analysts had forecast a reduction of 0.50 percentage points, with some predicting the bank could go as high as one percent. Nobody had forecast such a dramatic change to British borrowing costs.
“We had expected a 100 basis point cut to 3.50 percent but we believe the even larger cut to 3.00 percent is fully justified,” said Howard Archer, chief Britain economist at the IHS Global Insight consultancy.
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