The Bank of England made a shock 1-1/2 percentage point cut in interest rates today to just 3 per cent, their lowest level in more than half a century, as it seeks to prevent Britain from sliding into a deep recession.
That was the biggest official interest rate cut since the 1981 slump and completely wrong-footed analysts who had mostly been predicting a half-point reduction. Not one in 62 polled by Reuters had expected such a massive move.
The BoE said the economic outlook had got a lot worse and drastic action was now needed. Economists said more rate cuts would still follow and it was possible Britain could soon have rates the same level as in the United States - one percent.
"The MPC needs to keep cutting interest rates aggressively. I think that they will need to fall to 1 per cent," said Roger Bootle, economic adviser to Deloitte.
"Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan."
Two-year bond yields fell to a record low below 2.5 per cent. The pound, already down about 20 per cent this year, fell but then rose after the rate verdict as investors bet the economy's growth prospects had improved.
The British economy shrank for the first time in 16 years in the third quarter and most economists expect further contraction through next year and only a small recovery in 2010, when Prime Minister Gordon Brown must call an election.
The Swiss National Bank and European Central Bank also cut interest rates on Thursday as countries all around the globe try and cope with the fallout from the credit crisis that has felled some of the biggest financial institutions around the world.
"It is welcome that we are having co-ordinated cuts," said Treasury Minister Yvette Cooper shortly after the moves.
Thursday's stunning BoE move follows a globally co-ordinated emergency rate cut of half a percentage point last month, meaning British rates have come down by nearly three percentage points since last December.
While some praised the latest BoE decision as courageous, others wondered why Governor Mervyn King, who often says he wants monetary policy to be boring, had taken so long.
One BoE policymaker David Blanchflower had been calling for rates cuts for most of this year but the majority of the Monetary Policy Committee had been fixated on inflation running significantly above the central bank's 2 per cent target.
The economy, meanwhile, has been slowing sharply. House prices started sliding a year ago as the supply of new mortgages has all but dried up in the wake of the credit crunch.
The average British home now costs 15 per cent less than it did a year ago, according to the country's largest mortgage lender, raising the prospect of hundreds of thousands falling into negative equity - their home worth less than their debt.
Reuters