MercoPress. South Atlantic News Agency

UK cuts rate to 5.25% but warns on inflation and slowdown

Support from the CBI but for the Chambers of Commerce not enough

The Bank of England cut interest rates 0.25 percentage points to 5.25% amid signs that the UK economy is slowing down. Fears over rising prices and balancing growth and inflation made the Thursday cut relatively soft.

Taking the basic bank rate "to 5.25% was necessary to meet the 2% target for CPI inflation in the medium term", said the BoE in its Thursday release. The previous change in Bank Rate was a reduction of 0.25 percentage points to 5.5% on 6 December 2007. Analysts had widely predicted the move, which followed recent cuts in the US, where the Federal Reserve has slashed its borrowing costs to 3% from 4.25%. In its release the BoE Monetary Policy Committee said that international growth prospects have deteriorated and the continuing disruption of global financial markets have had an impact in the UK, where credit conditions for households and businesses keep tightening. "Consumer spending growth appears to have eased. Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect", said the release. "These developments pose downside risks to the outlook for inflation". The BoE said that CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are "expected to raise inflation, possibly quite sharply, in the coming months", plus the fact that the lower level of sterling will boost import costs. "The impact on inflation should begin to fade later in the year but measures of inflation expectations are currently elevated. These developments pose upside risks to the outlook for inflation further ahead". To return inflation to target in the medium term and given the current outlook, "some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary". "The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target". The Confederation of British Industry, CBI, welcomed Thursday's rate cut and said it was pleased there had not been a bigger reduction. "It is clear that it is a delicate balance with inflation pressures," said the CBI's Ian McCafferty. "A quarter of a point now and watching very carefully for how inflation develops in the coming months is the best strategy". But the British Chambers of Commerce disagreed. "Threats to growth are much more acute now than risks of higher inflation, and we would have welcomed a bold UK move to 5% today," said its economic adviser David Kern. Trade union umbrella body the TUC also welcomed the decision. "Homeowners will be pleased at the prospect of lower mortgage payments and UK manufacturers will look forward to paying less when they want to borrow to invest," said TUC head of economic and social affairs Adam Lent.