Bank of England cuts interest rates to 5.5%

The Bank of England’s Monetary Policy Committee today voted to reduce interest rates by 0.25 percentage points to 5.5%.

Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.

The previous change in Bank Rate was an increase of 0.25 percentage points to 5.75% on 5 July 2007.

Barry Naisbitt, Abbey's chief economist, commented: "The Monetary Policy Committee (MPC) was expected to reduce rates soon and, although few commentators confidently expected it to act this month, the reduction comes as no great surprise.

“The 0.25% cut in rates, from 5.75% to 5.50%, was the first reduction since August 2005. The cut reflects more evidence of slowing economic growth, particularly from service sector indicators and the housing market, and a forward-looking view that further slowing is likely, so reducing inflationary pressures. This early action by the MPC is important in supporting economic activity at a time of uncertainty and it will be a welcome decision for those households and companies that have seen steady rises in their interest payments over the past year.”

Stephen Leonard, Director of Mortgages at Alliance & Leicester, commented: “The decision to cut rates is excellent news for all mortgage customers and particularly the 1.4 million homeowners coming off short-term fixed rates in the next year."

"Having enjoyed historically low fixed rates, this move to reduce the cost of borrowing will be a welcome one.

“The rate cut will also be welcomed by first time buyers who have been unable to get onto the housing ladder in the past year, as it will make mortgages more affordable.

“Those considering entering the market for the first time should consider a fixed-rate mortgage as it will guarantee the monthly repayment, allowing borrowers to budget with certainty. For those borrowers with more financial flexibility, a base rate tracker mortgage still offers good value and the opportunity to benefit from any further rate cuts.”