Interest rate cut is first in two years

The Bank of England cut interest rates for the first time in two years yesterday in response to sluggish consumer spending and business investment but hinted it was not ready to cut again soon.

The move, which had been widely expected in the City, takes base rates down a quarter point to 4.5%.

The Bank's monetary policy committee (MPC) had raised the cost of borrowing five times between November 2003 and August last year to 4.75% in an attempt to rein in runaway household spending and house prices.

Yesterday's change means cheaper mortgages for home owners with variable rate loans but spells lower returns for savers. The cost of a typical £100,000 repayment mortgage will fall by around £16 a month, said the Halifax.

Most lenders said after the MPC's announcement at noon that they would match the MPC by cutting their own base rates by a quarter of a percentage point. Fixed-rate mortgages have been falling in price for the past couple of months in anticipation that the bank would cut the price of borrowing.

The MPC, meeting for the 100th time since its inception in 1997, has been surprised by the extent of the slump in spending by households in recent months and has also been disappointed by the pace of investment spending by firms, which it had been expecting to pick up strongly.

The housing market, too, has stalled and house prices have begun to fall in some parts of the country, notably in London and the south-east. Manufacturing has tipped back into recession and unemployment has started to rise, although the large services sector remains robust.

"In the first half of the year, output growth in the UK was subdued. Household spending and business investment growth have slowed," the MPC said in a statement accompanying its decision, although it made no mention of any impact from last month's London bombings.

Its point about spending was demonstrated yesterday by new figures from the Society of Motor Manufacturers and Traders showing that private car sales in the first seven months of this year were almost 11% lower than the same period of 2004.

But the MPC also said there were signs of a renewed pick-up in consumer spending, adding that the recent rise in the stock market to its highest level for three years and the recent fall in the pound's value, which makes British exports cheaper, "should boost activity".

This was taken by most City commentators as a hint that the MPC was not about to embark on a rapid easing of monetary policy.

"The cut in base rate today was much mooted but it was reactive and does not signify an easing of the cycle or hint at any further relaxation of monetary policy," said Kenneth Broux, economist at Lloyds TSB.

Industry was pleased with the MPC's move. "This cut will be a catalyst for growth and will provide an essential boost to consumer and business confidence," said CBI chief Sir Digby Jones.

The property website Rightmove also welcomed the move but thought the MPC should have done it sooner.

"This belated but welcome drop in interest rates will be a real boost for sentiment in the market, and a springboard for a more healthy property market in 2006," said Miles Shipside, the company's commercial director.

But the veteran City economist Roger Bootle, head of the consultancy Capital Economics, was less convinced.

"Today's 0.25% cut in interest rates to 4.5% will not be enough to offset the economic weakness caused by the housing market and consumer spending slowdowns. More cuts will be needed," he said, predicting rates down to 3.5% by the middle of next year.

Despite the reduction, interest rates in Britain remain well above those in the United States at 3.25% and the euro zone at 2%. The European Central Bank yesterday left its key rate on hold for the 26th month running.