BoE cuts rates to 5.5%
7 Dec 07

"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" - Bank of England statement

The Bank of England has cut rates to 5.5%. Over the last few weeks since our team's presentation at the Target 2.0 competition, I have supported a rate cut, and now it has come!

The Bank points out deteriorating conditions in financial markets and "a tightening in the supply of credit to households and businesses." This threatens growth prospects and could allow inflation to fall far below to 2% target.

Although rising inflation still remains a threat, the BoE said that threats in the wider economy justified a rate cut.

Despite rates falling, it is not certain whether banks will pass on the benefit to borrowers as they "seek to rebuild margins". However, Nationwide and Halifax have lowered their variable-rate mortgages by 0.25%.

It is predicted that rates will fall to 5% by next summer.

The ECB also made its rate decision yesterday and decided to keep it on hold at 4%. As inflation is very high at 3%, there was talk of a rate hike. Jean-Claude Trichet, the ECB president is more worried about inflation than the global credit squeeze, showing how different the BoE and ECB are treating the current situation.

Links:
Bank cuts UK rates to 5.5% - The FT (7 Dec 07)