Bank of England cuts interest rates to 4.5%

8 October 2008

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."

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