UK Cuts Rates to Stem Economic TurbulenceBritish Central Bank, the Bank of England cut the base interest rates by a further quarter point from 4.75 percent to 4.5 percent Thursday in a new effort to stem the economic turbulence triggered by last month's terrorist attacks on the US.It is the sixth time the bank has cut rates this year amidst worries about consumer and business confidence and leaves British base rate at its lowest level since 1964. Central banks around the world slashed borrowing costs to try to limit the economic impact of the September 11 attacks. The bank's Monetary Policy Committee (MPC) said in a statement that "the weaker world outlook and increased uncertainty have set back UK business and consumer confidence, and may, for a time, restrain business and household spending." "The statement made it clear that the latest monetary easing was linked primarily to weaker growth prospects and reflects an ' insurance policy' against a further slowdown in the UK," said an economist in London. Industry, which will now enjoy lower borrowing costs, welcomed the MPC's move. The Confederation of British Industry (CBI) said the Bank had made "the right decision." But chief economist at the British Chambers of Commerce Ian Fletcher said that "a quarter percent cut represents more of a gentle nudge to the economy than the decisive push that business was seeking." The Engineering Employers' Federation also wanted the bank to take more aggressive approach. "We urge the bank to continue to respond rapidly to further evidence of economic weakness and not to be distracted by the siren voices of inflation hawks," it said. But in the city, some economists thought there was little need for rates to come down much further. Financial markets gave little reaction to the announcement, which had been widely expected. The bank said early signs suggested that the British economy would not be as badly affected as the US following the attacks. On Tuesday the US central bank, the Federal Reserve, implemented its second half-point rate cut since the atrocities, taking rates there to 2.5 percent. Official data showed British manufacturing sector as a whole, which accounts for around a fifth of economic output is already in recession when defined as two quarters of contraction while service sector and public spending remained strong. But a series of surveys painted a mixed picture of British economy. A survey released on Thursday pointed to weakness ahead for the labor market, where unemployment still remains at the lowest for decades. But it showed demand for new staff fell for the fourth month in a row in September, indicating the jobless total may soon start to tick up. On Wednesday a survey showed British service sector shrinking for the first time in two and half years, a significant change as until now because growth in the service sector had been offsetting the recession being experienced in manufacturing. But on the same day a study by the Confederation of British Industry said retail sales grew at their fastest rate last month for five years. The state of the housing market is also unclear. As to the inflation level, earlier in the week another survey from the Nationwide said prices jumped 2.8 percent in September, the highest monthly increase since June 1993. There was some speculation before the decision that the bank may choose to leave rates alone this month, for fear of stoking inflationary pressures. Inflation in the UK rose to 2.6 percent in August - above the bank's target level of 2.5 percent. |
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