The Bank of England cut its key interest rate by a quarter of a percentage point to 4.5% today, citing possible inflationary risks and subdued economic
growth during the first half of 2005.
Economists had widely expected the nine-strong Monetary Policy Committee to implement a cut, the first since July 2003 when rates fell to 3.5% - the lowest point in almost 50 years.
The European Central Bank shortly afterwards held the minimum bid rate for its regular refinancing operations steady at 2%, where it has been since June 2003. The US Federal Reserve was meanwhile thought likely next week to continue raising the cost of borrowing from the current 3.25% in a measured manner, possibly to 4% by the year's end.
In a statement accompanying its decision, the MPC said it judged that a decrease of 0.25 percentage points in the repo rate to 4.5% was necessary to keep CPI inflation on track to meet the 2% target in the medium term.'
The MPC, which is to publish its latest inflation and output projections on August 10, said that high oil prices may raise' inflation further in the short term. British 12-month inflation, as measured by the consumer price index, hit in June the 2% target which the central bank is charged with meeting by the government.
In the first half of the year, output growth in the UK was subdued, the Bank said at the conclusion of its regular two-day meeting. 'Household spending and business investment growth have slowed. Although there are some signs of a pickup in consumer spending, downside risks remain in the near term,'it said.
Looking further ahead, however, the rise in equity prices and the recent fall in the sterling exchange rate should boost activity, it added.
The repo' rate - the rate of interest at which the BoE lends to commercial banks - had stood at 4.75% since August 2004, when policymakers last raised rates. The MPC carried out five quarter-point increase between November 2003 and August last year in moves aimed at helping to cool consumer spending and Britain's red-hot housing market.
British high street banks, meanwhile, mirrored the Bank of England, by cutting their home-loan lending rates by 0.25 percentage points.
