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THE Bank of England cut its key interest rate by 50 basis points to a fresh record low of 1 per cent.
06 February 2009 @ 19:01

In its latest attempt to shore up the ailing UK economy, the move by the central bank brings the total amount of cuts since October to a massive 400 basis points. That, along with the weakness of the pound and slowing inflation, should provide a significant boost to activity.

On the continent, the European Central Bank left its main refinancing rate untouched at 2 per cent, as widely expected.

But European Central Bank president Jean-Claude Trichet paved the way for another cut in official interest rates next month, saying that rates had room to fall amid signs of weakening inflation and "persistent weakness" in economic activity in the months ahead.

The British Government has also cleared the way for the BOE to buy securities issued by banks and businesses, increasing the money supply, if it feels such a move is necessary to prevent inflation from falling sharply below its 2 per cent target.

In a statement accompanying the decision, the BOE’s Monetary Policy Committee said while rate cuts to date will have a significant impact on monetary conditions, it has seen a substantial risk of undershooting the inflation target in the medium term.

"Output dropped sharply in the fourth quarter of 2008 and business surveys point to a similar rate of decline in the early part of this year," the MPC said.

"Credit conditions faced by companies and households have tightened further.”

Of the 15 economists surveyed by Dow Jones Newswires last week, 13 had forecast that the MPC would cut to 1 per cent. Two had expected a full percentage point reduction to 0.5 per cent.

The ECB’s Mr Trichet warned that demand for exports had been waning faster than anticipated, and that risks to economic growth were on the downside even after a "very negative" fourth quarter in 2008. Financial conditions remained tight in the 16-member currency union, he said.

Inflation was declining rapidly, but was expected to rise again later in the year, Trichet said.

The outlook for price stability was "surrounded by uncertainty" but inflation expectations appeared anchored at present, Mr Trichet said.

The ECB was "monitoring very closely" all developments, he said.

Mr Trichet's references to weak exports and a long stretch of weak economic activity "are all new and give a dovish flavour," said Aurelio Maccario, chief Eurozone economist for Unicredit.

“The statement confirms that a 50 basis-point rate cut in March is absolutely in the pipeline."

Slower inflation should give the ECB sufficient leeway to cut in March, economists said.

The annual inflation average for the 16 countries sharing the euro fell to 1.1 per cent in January from 1.6 per cent in December, well below the ECB's comfort zone of just below 2 per cent.

The consumer price index is likely to fall further in the first half of 2009, reversing last year's oil-price driven spike to rates of up to 4 per cent.

Markets have already priced in expectations for more ECB rate cuts as Euribor rates for maturities of up to three months, a measure of short-term interbank lending rates, show.



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