London: The Bank of England Thursday cut the base rate of interest by half a percentage point to an all-time low of 1.5 percent in an effort to bring down inflation and kick-start moribund credit flows.

The Bank's Monetary Policy Committee, which is charged with keeping inflation at 2 percent, said that cuts in interest rates since October 2007, coupled with a substantial fall in the sterling and “prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed”.

“Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2 percent CPI inflation target in the medium term at the existing level of Bank Rate,” it said in a statement.

“Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.5 percent was necessary to meet the target in the medium term.”

Inflation is currently well above target at 4.1 percent, but is expected to fall as prices tumble on lower demand in a recession.

Interest rates have never fallen below two percent since the establishment of the Bank of England in 1694.

The Bank said that the world economy appeared "to be undergoing an unusually sharp and synchronised downturn".

“In the United Kingdom, business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year,” the Bank said.

However, economists said a series of interest rate cuts have been ineffective, arguing the main problem facing the British economy is the lack of credit rather than the cost of loans.

Finance Minister Alistair Darling told the Financial Times Wednesday the Bank would have to work "hand in hand" with the Treasury if it wanted to carry out "quantitative easing" - the economic term for printing more money.

However, the BBC quoted finance ministry sources Thursday as saying while such a move has not been ruled out, it is not currently on the agenda.

 

Source : IANS