THE BANK of England cut interest rates yesterday by another half a percentage point to its lowest rate on record, saying the world economy appeared to be undergoing an unusually sharp and synchronised downturn.
British interest rates now stand at 1.5 per cent; they have not been lower since the bank was founded in 1694. But many economists still fear the bank has not done enough and will be forced to follow the Federal Reserve into unorthodox measures later this year.
Rates have now fallen by 3.5 percentage points since October as policymakers pull out all the stops to revive an economy facing its first recession since 1992.
"2009 is also likely to witness radical monetary-policy developments," said Ross Walker of the Royal Bank of Scotland, who shares the view of UK chancellor Alistair Darling that the recession is likely to be longer and deeper than expected.
In a statement explaining the widely-expected move, the bank's Monetary Policy Committee said the pace of contraction in economic activity had increased during the fourth quarter of 2008, and that output was likely to continue to fall sharply during the first part of this year.
The committee added to pressure on the British government to find ways other than cutting interest rates to boost the economy, insisting that "further measures to increase the flow of lending" were needed.
The committee feels that there are two problems limiting the effectiveness of official interest rate cuts in the UK economy.
First, other interest rates paid in the economy - for instance, those banks charge to lend to each other and to businesses and consumers - will not move as much as normal as official interest rates approach zero because the monetary transmission mechanism has been hampered in the banking crisis.
Second, regardless of interest rates charged on loans, the banking sector and international capital markets more generally no longer have the ability to lend enough.
Most economists expect further interest rate cuts in the months to come as the economic outlook darkens. Mr Darling indicated that he would revise down his projections for the economy in his March budget this week, saying Britain was "far from through" the recession.
The government is looking at various guarantees for banks and corporate and household borrowers. It is also considering lowering bank capital ratios to allow banks greater flexibility in lending, even as their finances are under strain.
But yesterday, Mr Darling sought to quash speculation that Britain was about to follow the US towards policies of quantitative easing - creating money to purchase public and private sector assets, forcing more money into the economy.
The pound, down 15 per cent against the euro since October when the Bank of England started its interest rate campaign, rose after the decision as many in the market had been pricing in a bigger move after the last month's one-percentage-point reduction. - (Financial Times service, Reuters)
