MercoPress. South Atlantic News Agency

UK cuts rate 0.25%; expects inflation to fall back in mid term

The Bank of England on Thursday lowered interest rates to 5% from 5.25% in an attempt to spur the UK economy. This is the third rate cut since early December.

BoE argued that concern over the slowing down of the economy was more immediate that inflation, which should fall back to 2% in the mid term.

The Bank said that disruption in financial markets and tighter credit conditions could lead to a slowdown in the wider economy. The largest mortgage lenders say they will pass on the cut to their mortgage customers who pay variable rates. Business groups welcomed the decision and called for further cuts to shore up growth. "It is vitally important to ensure that problems in the financial sector and in the housing market do not damage wealth-creating businesses," said David Kern, economic adviser to the British Chambers of Commerce. "Undue delay in acting threatens to reduce the effectiveness of interest rate cuts that the MPC itself has anticipated already." The cut had been widely forecast by economists. The BoE release said that inflation which rose to 2.5% in February "is expected to rise further this year, reflecting the continuing impact of higher energy and food prices, as well as the recent depreciation of sterling on import costs. Such pressures are already evident in producer input costs and pricing intentions". However even if commodity prices remain at their current high levels, inflation should fall back argues the BoE. "But to ensure that inflation meets the 2% target in the medium term, the Monetary Policy Committee needs to balance two risks. On the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target. On the downside, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target". Therefore "the balance of these risks to the inflation outlook in the medium term justifies a cut in Bank Rate this month. Credit conditions have tightened and the availability of credit appears to be worsening. While the recent depreciation in sterling will support net exports, the prospects for output growth abroad have deteriorated. In the United Kingdom, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year. This should help to keep domestic inflationary pressures in check in the medium term". Finally the release states that a reduction in 0.25 percentage points to 5% was necessary to meet the 2% target for CPI inflation in the medium term. UK's biggest mortgage lenders responded quickly, saying they would cut their standard variable mortgage rates by the full quarter of a percentage point. Their mortgage rates which track the BoE base rate will be cut automatically also. That translates as slowing annual economic growth of between 1.5% and 1.75% this year, but not a recession, although inflationary pressures would still remain a problem. The BoE did not mention the housing market in its statement, but analysts said recent downbeat news on property prices had influenced the nine-strong MPC. The Halifax, the UK's largest lender, said on Tuesday that house prices fell by 2.5% in March, the biggest monthly decline since September 1992.