Highlights
In a move coordinated with the other major central banks, the Bank of England lowered its key interest rate by 50 basis points to 4.5 percent. They joined the Bank of Canada, European Central Bank, Federal Reserve, Swiss National Bank and the Sveriges Riksbank in the move. The People's Bank of China also lowered its key rate by 27 basis points following the announcement of the 50 basis point move by the major banks. The move comes as financial woes intensified in world markets with equities plunging and credit virtually nonexistent.

For the Bank of England, which has a clear preference for moving in smaller, 25 basis point increments, the magnitude of the ease can be seen as a testimony to how concerned the monetary authorities have become about the downturn in the real economy. It also signals a major shift in the focus of the BoE. Inflation is no longer seen as a threat even though the CPI is running some 2.7 percentage points above its 2 percent target. In September only one member of the 9-strong MPC voted in favor of a cut and just a month earlier one member wanted to see monetary policy tightened.

This latest reduction in interest rates should be seen as part of a much more general package of measures aimed at boosting liquidity in the financial markets and getting the wholesale money markets working again. Just yesterday the Chancellor announced a Stg50B financial rescue package, crucially including a guarantee on the money borrowed by banks from each other and other financial institutions for up to three years. Seen in this context, the thinking behind today's move by the BoE is very different from anything that we have seen in the past.

In its statement, the BoE said

"In the United Kingdom, CPI inflation rose to 4.7% in August, reflecting increases in food and energy prices. Inflation is likely to rise further to above 5% in the next month or two, in large part as the full effects of already announced increases in the price of domestic energy are felt. But inflation should then drop back, as the contribution from retail energy prices wanes and the margin of spare capacity in the economy increases. Pay growth has so far remained subdued and commodity price pressures have eased, with oil prices down substantially from their mid-summer peak.

"Conditions in international credit and money markets have deteriorated very markedly. Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets. The Committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required. The Committee therefore welcomed this morning's announcement of a Government programme to recapitalise the major UK banks.

"Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially, reflecting a sharp monetary contraction. Output growth slowed to a halt in the second quarter, business surveys point to further weakening during the second half of this year, and the labour market has softened. Consumer spending growth has slowed, in part as a result of the squeeze on real incomes, while business and dwellings investment have declined. Equity prices have fallen, and the further tightening in credit conditions will also weigh on domestic demand growth. The depreciation in sterling over the past year should support net exports, but the prospects for demand growth in the UK's main export markets have worsened. The weakness in output growth at home will open up a growing margin of spare capacity that will over time bear down on inflation.

"The Committee remains focussed on setting Bank Rate in order to meet the 2% inflation target. In doing so it continues to balance two risks. On the downside, there is a risk that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulls inflation materially below the target. On the upside, there is a risk that above-target inflation this year and next raises inflation expectations so that inflation persists above the target for a sustained period. During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the Committee judged at its October meeting that an immediate reduction in Bank Rate of 0.5 percentage points to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term."

2008 Release Schedule

Released On: 1/10 2/7 3/6 4/10 5/8 6/5 7/10 8/7 9/4 10/8 11/6 12/4