Interest rates at 37-year low

Interest rates in Britain were cut to their lowest level since 1964 yesterday when an emergency meeting of the Bank of England's nine-strong monetary policy committee joined the attempt by central banks around the world to prevent last week's terrorist attacks in America from causing a global recession.

Shrugging off worse-than-expected inflation figures, the Bank announced it was cutting its key repo rate from 5% to 4.75% - the fifth reduction this year - as an insurance policy against a severe economic downturn over the coming months.

Gordon Brown, the chancellor, said the move was part of "huge action and effort on be half of the international community" to minimise the impact on the global economy of the terrorist attacks.

Bank sources said that there had been no coordinated cut in rates, but that the decision had been taken in light of the half-point cuts in rates by the US federal reserve and the European Central Bank.

The MPC's decision, the first time it has cut rates between meetings since it was granted operational independence by the government in May 1997, prompted cuts in mortgage rates from some lenders, with the Nationwide building society saying that its home loans were at their cheapest since 1956, the year of the Suez crisis.

For Nationwide borrowers with a £50,000 loan, the Bank's action will mean a saving of £10.40 a month. Other lenders, for example, Abbey National, have passed on only part of the rate cut.

Although some members of the MPC have expressed concern at the strength of consumer spending in the UK, the statement issued by the Bank to explain its move underlined concerns among policy makers that global growth prospects have been put at risk. All nine members of the MPC attended the meeting convened by the governor, Sir Eddie George, yesterday morning.

In a statement announcing the cut, the Bank said: "Falls in stock markets around the world, and the likely impact on confidence, suggest a weaker outlook for global activity than appeared likely at the committee's meeting earlier this month. It is too early to make an informed judgment about the scale of the impact on the UK economy. But the direction of that impact and the associated risks are clear."

The reaction of industry to the decision was broadly welcoming, but there was some disappointment that the reduction was smaller than in the US and the eurozone.

The Engineering Employers Federation said: "The tragic events in the US have brought us into uncharted territory in terms of the impact on the world economy, in which a slight increase in inflation is merely a blip in the context of much bigger threats we face.

"In the light of half-point cuts by both the European Central Bank and the federal reserve, we are disappointed that the Bank of England felt unable to match these."

City analysts are optimistic that the MPC will cut rates again at its next scheduled meeting in October, by which time the Bank's economists will have completed an assessment of likely consequences of the attacks on the US.

Official data released yesterday showed that inflation excluding mortgage interest rates rose last month from 2.2% to 2.6%, the first time in two-and-a-half years that it has been above the government's 2.5% target.

Mr Brown said the Bank's move would help in what he called "testing times". Speaking on ITN, he said: "I think we've seen decisive action first of all to keep the markets moving to provide liquidity to the system, and then cooperative action around the world."

"It is part of our determination, not only that we shall never succumb to terrorism but also to maintain the conditions as far as we can for stability and growth in the world economy," Mr Brown said.