UK interest rates trimmed to 5.5%

[Detomah]

The Bank of England has cut UK interest rates to 5.5% from 5.75% amid signs that the economy is slowing.

Expectations of a rate cut had risen in recent days after figures indicated that economic conditions had deteriorated over the past few weeks.

The BBC's economics editor Evan Davis said the rate cut - the first since August 2005 - was aimed at preventing the slowdown getting out of control.

Mortgage lenders Halifax and Nationwide cut their rates in line with the move.

Financial website Moneyfacts said that lower borrowing costs would save between £15 and £20 a month on a £100,000 mortgage.

Experts had predicted that some lenders may not pass on the rate cut in full to consumers.

However, the speed of the response from the UK's two largest mortgage lenders will now put their rivals under pressure to follow suit.

"A reduction in interest rates is exactly what the market needs and will benefit consumers," said Michael Coogan, director general of the Council of Mortgage Lenders (CML).

"This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year."

Tough call

Chief economist at Lloyds TSB Corporate Markets, Trevor Williams, said that the Bank of England's decision to cut rates had been an "incredibly tough one".

He said that worries about inflation, with rising food and oil prices, "could easily have swayed the Bank to hold rates".

However, surveys this week have shown falling house prices and a slump in consumer confidence.

On Wednesday, Halifax reported that UK house prices dropped 1.1% in November, while Nationwide showed that its measure of consumer confidence had seen the biggest monthly decline since the survey began in 2004.

A number of retail and leisure companies have also warned of problems and that they are seeing a slowdown in demand on the High Street.

Our economics editor said that Thursday's rate cut was aimed at making sure the economy did not slow too quickly.

"It is about making sure that the slowdown, which seems to be happening, does not get out of control," he explained.

'Sensible move'

Another of the key factors behind the rate cut was an increase in Libor - the rate at which banks to lend to one another.

Libor has been rising because of problems in the US mortgage market and the subsequent credit crunch, and the fear is that this will make banks less willing to lend to consumers and companies.

"The credit crunch - which seemed to be resolving itself in October - has recently taken a nasty turn for the worse," said Peter Spencer, chief economist of Ernst and Young's Item Club.

EEF, the manufacturers' organisation welcomed the rate cut.

"Though manufacturing remains in good health a number of warning lights for the economy are now flashing amber," said Steve Radley, EEF's chief economist.

"This is a sensible pre-emptive move which will reassure business that the bank is on the case and help to cushion the economy from the worst effects of instability in the financial markets," he added.

More cuts?

The British Chambers of Commerce (BCC) praised the MPC's "commendable flexibility" saying the rate cut would help to alleviate potential dangers facing the economy and give a much-needed boost to business confidence.

"A cut in rates was clearly needed to counter the growing international threats emanating from the US, and to unblock the dangerous obstacles preventing the banking system from operating smoothly," the BCC's David Kern said.

"Threats to growth are much bigger now than risks of higher inflation."

Mr Kern added that if credit conditions remained too tight, a further cut in rates may be required early next year.

BBC NEWS | Business | UK interest rates trimmed to 5.5%