THE Bank of England cut interest rates by a quarter percentage point yesterday for the third time in five months in an attempt to cushion the economy from the global credit squeeze.
The cut to five percent had been predicted by 48 of 63 economists in a Reuters poll following data pointing to a downturn in the housing market, falling consumer confidence and a slowing economy. Financial markets showed little reaction to the verdict.
"The re-emergence of tensions in the money markets combined with evidence of a sharper deceleration in the housing market has spurred the Monetary Policy Committee into action," said Stuart Porteous, head of RBS Group Economics.
Only a few weeks ago, a cut in May had seemed more likely but market sentiment has changed swiftly, and the public mood has also darkened due to heightened fears of a recession in the United States and a wider global economic downturn.
The International Monetary Fund has downgraded its forecasts for United Kingdom economic growth this year to 1.6 percent - which, if realized, would be the weakest performance in more than a decade.
Worse expected
Credit market turmoil has made banks reluctant to lend, meaning little, if any, of the two rate cuts since December has been passed on to consumers and businesses. Home mortgage rates for many have actually risen, and the central bank's own credit-condition survey last week suggested the situation could get worse.
"Credit conditions have tightened, and the availability of credit appears to be worsening," the Bank said in a statement accompanying the decision.
Policy makers' biggest problem is how to juggle simmering inflationary pressures against slowing economic growth. While a weaker economy will help to keep a lid on inflation, the central bank will be wary of letting growth slow too fast.
BoE Governor Mervyn King has called the dilemma the toughest challenge the central bank has faced since it won independence to set interest rates in 1997.
Inflation has been above the 2-percent target since last October.