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Bank lowers interest rates to 5% Bank lowers interest rates to 5%
(20 minutes later)
The Bank of England's Monetary Policy Committee (MPC) has cut interest rates to 5% from 5.25% to spur the economy in the face of a global credit crunch. UK interest rates have been cut to 5% from 5.25% by the Bank of England in an attempt to spur the economy in the face of the global credit crunch.
It is the central bank's third cut in interest rates since early December.It is the central bank's third cut in interest rates since early December.
Analysts said that problems in the money markets and recent dire news on house prices drove the decision.Analysts said that problems in the money markets and recent dire news on house prices drove the decision.
But the credit crisis, which makes funding mortgages more expensive for banks, may mean they do not pass on the full reduction to borrowers. But the credit crisis, which makes funding mortgages more expensive for banks, may mean the full reduction in rates is not passed on to borrowers.
The bank said that disruption in financial markets could lead to a slowdown in the wider economy. The Bank said that disruption in financial markets could lead to a slowdown in the wider economy.
"Credit conditions have tightened and the availability of credit appears to be worsening," the central bank said in a statement.
Decision welcomedDecision welcomed
Business groups welcomed the decision and called for further cuts to shore up growth.Business groups welcomed the decision and called for further cuts to shore up growth.
The re-emergence of tensions in UK money markets combined with evidence of a sharper deceleration in the housing market has spurred the MPC into action Stuart Porteous, RBS
"It is vitally important to ensure that problems in the financial sector and in the housing market do not damage wealth-creating businesses," said David Kern, economic adviser to the British Chambers of Commerce."It is vitally important to ensure that problems in the financial sector and in the housing market do not damage wealth-creating businesses," said David Kern, economic adviser to the British Chambers of Commerce.
"Undue delay in acting threatens to reduce the effectiveness of interest rate cuts that the MPC itself has anticipated already.""Undue delay in acting threatens to reduce the effectiveness of interest rate cuts that the MPC itself has anticipated already."
The cut had been widely forecast by economists.The cut had been widely forecast by economists.
"So far the Bank’s gradual approach to cutting rates has been the right one," said Martin Temple, chairman of manufacturers' group EEF. "So far the Bank's gradual approach to cutting rates has been the right one," said Martin Temple, chairman of the EEF manufacturers' group.
"But, given how quickly the situation is changing, there are now greater risks to business and consumer confidence.""But, given how quickly the situation is changing, there are now greater risks to business and consumer confidence."
Mortgage rates riseMortgage rates rise
Homeowners on variable rate mortgages expecting to benefit from any cut could be disappointed, industry experts say.Homeowners on variable rate mortgages expecting to benefit from any cut could be disappointed, industry experts say.
As a result of the uncertainty in the financial markets and a shortage of funds caused by the global credit crisis, the rate at which banks lend to each other has remained high.
Many mortgage lenders have had to withdraw their most competitive deals in recent weeks.
Before the rate decision, Alliance & Leicester said it was raising rates on its entire mortgage range for the second time this week.Before the rate decision, Alliance & Leicester said it was raising rates on its entire mortgage range for the second time this week.
Nationwide is raising interest rates on some of its fixed-rate products by between 0.12% and 0.32% from Friday. However, Halifax, Nationwide and Barclays' mortgage arm the Woolwich said they would cut their standard variable mortgage rates by the full quarter of a percentage point.
Inflation risk
The BBC's economics editor Stephanie Flanders said that the quarter of a percentage point rate cut indicated that the state of the UK economy was broadly in line with the Bank's expectations.
That translates as slowing annual economic growth of between 1.5% and 1.75% this year, but not a recession, although inflationary pressures would still remain a problem.
The bank said inflation could remain above the government's target of 2% but should fall back even if the price of oil and other commodities remain at their current high levels.
It did not mention the housing market in its statement, but analysts said recent downbeat news on property prices had influenced the nine-strong MPC.
The Halifax, the UK's largest lender, said on Tuesday that house prices fell by 2.5% in March, the biggest monthly decline since September 1992.
"The re-emergence of tensions in UK money markets combined with evidence of a sharper deceleration in the housing market has spurred the MPC into action, said Stuart Porteous, head of economics at RBS.