LONDON – The Bank of England stunned financial markets on Thursday by cutting British interest rates to 3.75 percent, their lowest in almost half a century, citing fears over global and domestic demand.
The quarter-point rate cut was the first from the Monetary Policy Committee (MPC) since November 2001, and took borrowing costs to their lowest since early 1955.
Almost all City economists had predicted the nine-member MPC would not bow to ever louder calls from industry for cheaper money because of the country's still-booming housing market.
The European Central Bank, however, failed to follow the MPC's lead, leaving rates for the 12-nation euro zone steady at 2.75 percent. Calls for a cut there are growing too, however.
Financial markets, battered in recent weeks by the global economic slump and fears of war with Iraq, reacted swiftly with the FTSE 100 index of leading shares paring earlier losses to be around 22 points down on the day at 3,655.
Government bond prices also gained ground but the poundfell on the foreign exchanges both against the euro and dollar.
The MPC said in a statement that the prospects for demand, both globally and domestically, were somewhat weaker than previously anticipated.
"In order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to reduce interest rates by 0.25 percent."
Industry, now shedding 10,000 jobs a month, was quick to welcome the MPC's move.
"The warning signs are there for all to see. In the midst of such uncertainty manufacturers will breathe a sigh of relief that the MPC stands ready to do all it can to shelter the economy from the gathering storm clouds," said Stephen Radley, chief economist at the Engineering Employers' Federation.
With manufacturing seemingly headed back into recession, the FTSE down 10 percent in a month and job losses mounting as the threat of war in Iraq saps business confidence, the clamour for lower rates had been growing.
This week Britain's top health and beauty retailer Boots said it planned to close one of its factories, a move that could cost up to a 1,000 jobs. Holiday firm MyTravel also said on Tuesday it may slash 700 jobs.
And on Wednesday, the January CIPS/Reuters survey on the services sector showed growth there slowing to its weakest pace in a year.
Two members of the MPC have voted for a rate cut for four months running and clearly managed to persuade enough of the nine-member committee to join them this time.
George Buckley at Deutsche Bank, one of the only economists to predict the BoE would cut rates, said the reasons for a cut were extensive. "Generally just the consumer is strong, there's very little else propping this economy up," he said.
But most analysts had expected the majority of the MPC, including the Governor Sir Edward George and governor-designate Mervyn King, to want to keep policy steady, particularly when house prices and debt levels are soaring.
Halifax Bank, Britain's largest mortgage lender, said on Wednesday house prices jumped 1.5 percent in January. And house builder Bellway said business was booming.
House prices have risen around 25 percent in a year, spurred higher by low interest rates which have also financed a spending spree that has saved the economy from recession.
But most analysts are expecting spending to slow this year as income growth has already slowed and will take a hit from a rise in a payroll tax known as national insurance in April.