Bank lowers interest rate by 0.25%

For the first time in 20 months, the Bank of England today cut interest rates from 6% to 5.75%.

At its monthly meeting, the bank's monetary policy committee bowed to industry pressure and voted to lower rates by 0.25%. The move is intended to encourage spending by lowering mortgage and credit rates for consumers and borrowing costs for businesses.

The decision to lower the cost of borrowing in the UK comes after recent cuts by the US federal reserve. Interest rates have recently fallen by a full percentage point to encourage business and consumer spending and stave off a possible recession. US rates now sit at 5.5%.

The British economy looks much healthier, but the lower interest rates may also lower the price of sterling against the euro, giving a boost to British industry. Industry and unions had lobbied for a UK rate cut to boost confidence and prevent the effects of the US slowdown damaging prospects in Britain.

So far the bank has taken a cautious approach, with the more "hawkish" members arguing that they should wait for clear evidence that the British economy has also slowed before moving on rates.

But after last month's knife-edge five-to-four vote to keep rates on hold, most analysts had forecasted that there would be a majority for a cut this time.

Reaction to the decision was swift. MSF, the union for skilled and professional people, said interest rates should have been slashed by 1/2% today.

"A 1/4 of a teaspoon of medicine is not enough to cure the ills of UK manufacturing. It's the right medicine; it is just not enough," said the MSF general secretary, Roger Lyons.

He said that 130,000 manufacturing jobs were lost in the last year and that this trend will continue unchecked if the BOE does not make further cuts in the interest rate this year.

Ian Fletcher, chief economist at the British Chambers of Commerce, said: "It's been a long time coming, but this decision will help reassure UK businesses and investors at a time of growing economic uncertainty.

"With UK manufacturing still struggling on investment, in export markets, and at home in the face of tough import competition, this rate cut will help protect against the knock-on effects of weaker global demand on our economy," Mr Fletcher added.

Some mortgage lenders said immediately that they would pass on the rate cut to borrowers, which will shave nearly ?10 a month off a ?60,000 mortgage.

Scott Mowbray, marketing manager at Virgin One, said the company will pass on the full rate cut to customers, adding: "Competition for new mortgage business is set to be fiercer than ever in 2001, and so any failure among lenders to match this cut could see consumers vote with their feet."

Abbey National said it was cutting its standard variable rate for mortgages by 0.25%, although not right away. The new rate will be 7.49%, effective from February 9 for new borrowers and March 1 for existing borrowers.

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