Bank cuts rates to fend off US slide

The Bank of England took out an insurance policy yesterday against the recession in the United States spreading across the Atlantic when its nine-strong monetary policy committee (MPC) cut interest rates for the first time in 20 months.

Leading mortgage lenders reacted swiftly to the reduction in base rates from 6% to 5.75%, helping to boost the pre-election feelgood factor by chopping nearly ?10 a month off the cost of a typical ?60,000 home loan.

Employers' organisations and trade unions welcomed the decision, which follows 12 months in which the Bank had left interest rates on hold.

The move had been expected in the City, where dealers were confident that the committee would follow the lead set by America's central bank, the Federal Reserve, despite concerns that falling unemployment in the UK might push wages up.

The Bank made no comment on the decision, which followed a 5-4 vote last month to keep rates at 6%. Minutes of yesterday's meeting will be released in a fortnight.

Kate Barker, chief economist at the Confederation of British Industry, said: "This cut has come at the right time. Companies needed this cut to bolster their confidence and to sustain investment, which is vital to the UK's long-term future. Low inflation gives room for a cut now without damaging stability."

However, with underlying inflation at 2% comfortably undershooting the government's 2.5% target, there were calls for yesterday's reduction to be the first of many.

John Monks, general secretary of the TUC, said: "This is the first faltering step towards stabilising the economy, encouraging a more competitive exchange rate and helping manufacturing out of the doldrums. But with inflation still well below target, the Bank has no reason not to cut again, and soon."

Stephen Radley, chief economist at the Engineering Employers' Federation, said: "The MPC's move will give a much needed boost to growth, confidence and investment. This should be the first in a series of cuts."

After yesterday's noon announcement, Abbey National cut its standard rate from 7.74% to 7.49%, a shade below Halifax, which cut its rate to 7.5%, effective from March 1.

But Nationwide said it would not be cutting its rates for the time being, because borrowers had already benefited from a 0.2% unilateral cut in December, which took its standard rate to 7.09%.

HSBC stood by its strategy of undercutting all other lenders on standard variable rate, reducing its rate from 6.75% to 6.5%.

But for many home buyers the rate cut translates into only small savings. Halifax said the average mortgage was ?30,000, so yesterday's rate cut resulted in a saving of only ?4.74 a month. Nearly a third of borrowers will not benefit at all because they are on fixed rates.

The winners are the increasing number who, aware of the likelihood of future rate cuts, have shunned fixed products in favour of "discount" mortgages. Mortgage brokers say that in recent months up to three-quarters of house buyers have opted for discount mortgages, which typically give 1.5%-2.25% off the standard variable rate for two to three years. The true "pay rate" on most new mortgages therefore fell from 5.5% to 5.25%.

The former MPC member Sir Alan Budd said the Bank had been right to cut rates. "This is an insurance against the risk that a very sharp slowdown in the US would affect us," he told BBC Radio 4's The World at One programme. "It is sensible just to put a little more demand into this economy just to keep it plugging along in a comfortable way."