The Bank of England Thursday cut a key interest rate from 1 percent to 0.5 percent, a new record low.
The reduction in the official bank rate was expected. The bank, which is Britain’s central bank, has been reducing rates steadily since October, when the rate was 5 percent. The 315-year old bank’s previous rate cut was in early February, when it cut the rate from 1.5 percent to 1 percent. In addition to the rate cut, the bank announced it would pump £75 billion ($105 billion) into the economy. Known as “quantitative easing,” the move is meant to encourage banks to lend funds again to each other as well as to individuals and businesses. Despite interest rate cuts, most banks have not passed the savings on to their customers. The Bank of England wants to encourage them to do so.
British economy to worsen in 2009
Blog: Business 360
Q & A: What is ‘quantitative easing’
The plan is that the Bank of England will “create” more money on its balance sheet, then use this to buy banks’ assets such as home loans and government bonds, pumping extra cash into the system. The banks all have accounts with the Bank of England, and the money will simply be credited to those accounts. It may take as long as three months to carry out the program of purchases, the bank announced. The decision to cut rates is taken on a monthly basis following a vote by the bank’s Monetary Policy Committee. In a statement the bank said the committee had introduced quantitative easing because “a further easing in monetary policy was likely to be needed” as UK inflation was likely to fall below its two percent target by the second half of 2009. The bank also cautioned that “a very low level” rate would have “counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system.”