Bank of England cuts interest rates to 4.5%
The Bank of England has unveiled a shock 0.5% cut to interest rates today, a day earlier than expected.
The Bank of Canada, European Central Bank, the US Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the Bank of Japan also acted to lower official interest rates.
The Bank of England's Monetary Policy Committee (MPC) made the rate cut after an emergency meeting.
In a statement, the central bank said: "During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the MPC judged at its October meeting that an immediate reduction in base rate of 0.5% to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term."
Inflation in the UK currently stands at 4.7%, reflecting increases in food and energy prices. The Bank of England says inflation is likely to rise further to above 5% in the next month or two, but should then drop back.
Despite the fact that inflation has not yet peaked, the central bank notes that conditions in international credit and money markets have "deteriorated very markedly".
It adds that the base rate cut can't be expected to resolve the current problems in financial markets.
It adds: "A significant increase in the capital of the banking sector would be required. The MPC therefore welcomed this morning’s announcement of a government programme to recapitalise the major UK banks."
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.