The Bank of England took another quarter point off British interest rates yesterday, lowering its repo rate to 5 per cent and cutting the cost of borrowing to the lowest level for 22 years.
Almost exclusively, the move reflected the concern of the bank's monetary policy committee (MPC) about the deflationary consequences of sterling's appreciation on the currency markets at a time when the economy is stagnating.
Commenting on the rate cut, the bank said the MPC had considered recent economic developments against the backdrop of its detailed review of inflation prospects carried out early last month.
"Taking into account all the evidence on the inflation outlook, the committee judged that it was now more likely that inflation would undershoot the 2.5 per cent target and therefore voted to reduce the bank's repo rate by 0.25 per cent," said the bank.
The rate reduction was quickly welcomed by manufacturing industry in the belief that lower money costs would take sterling lower on the currency markets, thereby putting some margin back into pricing for exports and curbing import competition.
Although the bank's rate reduction had been discounted on the foreign exchanges, sterling shed a little of its recent gains, slipping below three deutschmarks again with a day's fall of 1.1 pfennigs to DM2.9857.
Sterling will need to go lower if the bank's concerns are to be eased. If sterling retains its "hard currency" status, further interest rate reductions could still be on the cards.
