MercoPress. South Atlantic News Agency

Bank of England cuts rate to 5.5% on slow growth concern

In spite of emerging inflation, growth is more important for Mervyn King

The Bank of England announced Thursday a 25 points cut in the key interest rate from 5.75 to 5.5% following on fears of a slowing UK economy. The decision came as the BoE tried to strike a balance between rising inflation and further evidence that the housing boom is slowing and consumer confidence deteriorating.

"Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow" the bank said in comments released with its decision. Just a few months ago, most economists had expected the next move by the Bank of England to be a rise in rates to 6% from 5.75% to counter strong inflation and close off a series of rate hikes over the year to July. However, the U.S. subprime mortgage market collapse and the subsequent worldwide credit squeeze in the late summer have hit Britain hard. BoE Governor Mervyn King acknowledged earlier this month that tighter credit conditions may curb household demand, a sentiment reinforced on Thursday. "Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead," the bank said. Mortgage lender Halifax revealed Wednesday that house prices across the country fell 1.1% in November, bringing house price growth for the year to 6.3%, down from 8.9% in October. It was the first time since 1995 that the lender had reported price drops for three consecutive months. The Nationwide Building Society's index of consumer confidence, also released Wednesday, dropped 12 points to 86, the biggest decline since it was introduced in May 2004, as faster inflation erodes households' purchasing power. Rising consumer prices have complicated the BoE decision. Inflation rose 2.1% at an annualized rate in October, putting the measure above the government's 2% target. It was the first time the BoE trims rates since August 2005.