Bank slashes rates again

Interest rates have been slashed to another all-time low as the Government prepares to pump more money into the economy. The Bank of England has knocked half a percentage point off the cost of borrowing - from 1 per cent to 0.5 per cent. With the sixth successive month of cuts, the Bank is pulling out all the stops to stave off a prolonged slump. But the Bank, which knows the cut may not be enough and that high street banks are still reluctant to lend, has asked Chancellor Alistair Darling to pump an extra £75 billion into the economy over the next three months. So-called Quantatitive Easing - increasing the money supply - has been welcomed by business leaders. Ian McCafferty, the CBI business group's chief economist, said: "The conventional rate cutting tool is becoming less and less effective as a means of stimulating the economy. "A swift move towards quantitative easing as a way of boosting money supply and lending directly is now the MPC's best bet for supporting the economy and getting credit flowing again." Whether QE will work, however, depends on the extent to which struggling banks pass on the extra funds created by the Bank of England. Liberal Democrat Treasury spokesman Vince Cable said the Government should be wary of stoking up inflationary pressures for the future. He said: "Today's rate cut means the Bank of England has now run out of conventional weapons to fight this recession. "With interest rates now close to zero and the real threat of prolonged deflation and recession, the Bank's decision to start quantitative easing is understandable. "Directly increasing the amount of money flowing into the economy is now the only clear option. "However, the Government must be careful that this kind of radical action doesn't quickly turn deflation into high inflation." Meanwhile, around four million homeowners could see their monthly mortgage repayments drop as a result of the cut. Roughly a third of mortgage customers have tracker loans, the majority of which will automatically move down in line with the Bank of England base rate. But for those on other deals tied to standard variable rates, banks and building societies are unlikely to see the rate cut passed on.

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ITN | March 5, 2009

Tags:. .mccafferty. .prolonged. .inflationary. .mpc. .cbi