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And Bank Of England Cuts The UK Banke Rates To Just 2%!!

Thursday, December 4, 2008

Just out on Bloomberg News: Bank of England Cuts Key Interest Rate to 2%, Lowest Since 1951

  • By Jennifer Ryan

    Dec. 4 (Bloomberg) -- The
    Bank of England cut the benchmark interest rate to the lowest level since 1951 as lenders rationed credit, pushing the U.K. economy deeper into a recession.

    The Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by 1 percentage point to 2 percent, the central bank said in London today. The move matched the median forecast of 61 economists in a Bloomberg News survey. Sweden’s central bank also cut its rate today by the most since 1992.

    King discussed the possibility of lowering the interest rate to zero for the first time on Nov. 25 and said the biggest challenge he faces is renewing the flow of credit in the economy. Service industries, manufacturing and construction shrank at the fastest pace on record last month and house prices dropped 2.6 percent, the most since 1992.

    “There’s no sign that any of the data is in any way bottoming out, and it justifies big moves in interest rates,” said Grant Lewis, an economist at Daiwa Securities SMBC Europe Ltd. in London and a former U.K. Treasury official.
    “There are further cuts in the pipeline.”

    Investor speculation of interest-rate reductions pushed the pound to a record low of 86.75 pence per euro today. The currency was at 86.67 pence per euro as of 11:49 a.m. in London.

    The interest rate now matches the lowest in the central bank’s history. It was last at 2 percent when Winston Churchill’s victory in a general election made him prime minister for the second time.

    ECB Decision

    The U.S. Federal Reserve cut its key rate to 1 percent last month. The European Central Bank will reduce its benchmark by a half point to 2.75 percent at 1:45 p.m. in Brussels today, according to the median estimate of 56 economists in a Bloomberg News survey.

    The Bank of England’s move was the latest in a series of steps across the world today. Sweden’s Riksbank lowered its key rate by 1.75 percentage points to 2 percent. New Zealand’s central bank cut its rate by a record 1.5 percentage points to 5 percent, and Bank Indonesia reduced its rate to 9.25 percent from 9.5 percent.

    The U.K. benchmark may fall to zero early next year, forcing policy makers to consider other means of restarting bank lending and reviving the economy, former policy maker Willem Buiter said this week. Such steps may include expanding money supply and using it to finance government deficits or buying securities such as bonds or stocks, he said.

    ‘Acute’ Problems

    “U.K. rates could end up American-style because the problems in the financial sector are so acute,” said Lewis, the Daiwa economist.

    King said Nov. 25 that “close coordination” with the government is needed if the interest rate reaches zero and said the “most pressing” challenge facing policy makers is getting financial institutions to resume lending. Banks approved just 32,000 mortgages in October, matching the least since 1999.

    Interest rates below 1.5 percent “wouldn’t leave them with much scope for further cuts,” said Peter Dixon, an economist at Commerzbank AG in London. “We may have to see the bank looking at other measures.”

    Policy makers face a growing risk of missing their 2 percent inflation target as economic growth slows. King refused to rule out the risk of deflation when he presented forecasts in November, which showed a danger that consumer prices may start to fall across the U.K. economy. An index showing prices charged by services companies fell to the lowest since 2001 last month.

    Economic Outlook

    Recent reports indicate the outlook for Britain’s economy is worsening. Stagecoach Group Plc, owner of the U.K.’s biggest rail franchise, said yesterday it may cut jobs as earnings experience “downward pressure.” Bellway Plc, a homebuilder, said today its order book has halved after banks granted fewer mortgages and a separate report showed U.K. car sales plunged 37 percent in November from a year earlier, the most in 28 years.

    The U.K. economy may contract by 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. Gross domestic product fell by 0.5 percent in the third quarter, the first drop in 16 years.

    Services from banks to recruiters contracted at the fastest pace in at least 12 years in November, and manufacturing and construction shrank, surveys by the Chartered Institute of Purchasing and Supply showed this week. House prices fell 2.6 percent on the month, HBOS Plc said today.

    “This economy needs all the help it can get at the moment,” said Malcolm Barr, an economist at J.P. Morgan Chase & Co. who forecasts the benchmark rate will fall to 1 percent by May. “Their own analysis of the issue shows they need rates to be a lot lower.”

The Global World Cut is surely ON!!!

And the winner is the one to cut to ZERO??

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