Interest rate falls to historic low

Bank of England brings interest rate down to 1.5%

8 January 2009 13:29

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The cost of borrowing fell to an all-time low today, as the interest rate was cut to 1.5% in a bid to revive the UK economy.

The cut of half a percentage point brings the interest rate down to its lowest ever level in the Bank of England’s 315-year history.

This is the fourth successive rate cut since October, when it was reduced from 5% to 4.5%. This was followed by a drop of 1.5% in November, and a further 1% fall in December.

However, business lobby groups still criticised the Bank for being too cautious.

David Kern, chief economist at the British Chambers of Commerce (BCC), said he was disappointed with today’s decision by the Monetary Policy Committee (MPC).

“We believe it is an inadequate reaction to the rapid worsening in economic circumstances,” said Kern.

“The recent downward revision in GDP figures, coupled with further unemployment increases and rapid declines in house prices, justified a full 1% cut in rates. The outlook is dire, and the MPC must act forcefully.”

Britain ’s manufacturing lobby group, the EEF, seconded this call, imploring the MPC to make a further, unscheduled cut of a full percentage point this week to avoid the UK economy sliding into a prolonged depression.

However, Alan Tomlinson, a partner at insolvency practitioners, Tomlinsons, questioned whether today’s cut would make much tangible difference to those businesses already fighting for survival.

“Today’s cut will of course inject some confidence into the business community but for companies that are already struggling it will be of no real help,” he said.

“Many of the companies we are advising at present have fundamental problems such as sharp drops in turnover, large debts and ever weaker pricing, which can’t be rectified by lower rates. For many companies out there, this will be too little, too late.”

On a brighter note, following widespread criticism last year that banks were failing to pass on rate cuts to businesses, Lloyds TSB has responded to today’s decision by pledging to apply the 0.5% cut, in full, to small firms with variable rate loans and overdrafts.