Base rate cut to 3%

7 November 2008

The Bank of England today cut the base rate from 4.5% to 3%, in a shock move that exceeded many economists’ predictions.

Most economists had predicted a 0.75% to 1% base rate cut in the run-up to the announcement, and only a few days earlier 0.5% seemed a more realistic figure.

The cut is the largest since a 2% drop in 1981 - and at 3%, the base rate now stands at its lowest level since 1955.

BBC economics editor Hugh Pym said: “The Bank of England (…) is clearly very concerned about the possibility of a prolonged recession in the UK.

“The risks of high inflation have now evaporated, and because the bank is worried that inflation will now fall well below its target, it has felt the need to come up with this cut, which is much bigger than expected.”

Although many economists will view the cut as confirmation that the economy is set for a severe downturn, the news may be welcomed by potential borrowers, who could benefit from reduced interest rates on loans and mortgages.

“The base rate cut will make some of the funds needed for loans much cheaper to lenders, and this may be passed onto consumers accordingly,” said a spokesperson for Think Money. “However, the rate of lending between banks (LIBOR) still remains high, and unless this falls more closely in line with this base rate, it remains to be seen whether lenders will pass the full base rate cut onto consumers.”

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Tags: base rate, base rate cut, bank of england

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