Interest rates slashed to 3%

The Bank of England has shocked City observers by reducing interest rates by 1.5% to 3% in a bid to stimulate the economy and stave off a deep recession.

Industry commentators welcomed the surprise cut as a 'brave move' by the bank’s Monetary Policy Committee. The decision followed intense lobbying by the construction industry and housebuilders, as well as wider business interests, for at least a 1% rate cut.

City observers were, however, still expecting the Bank to only cut rates by half a per cent at its monthly meeting this morning, and shares immediately spiked on the news, recovering most of earlier losses.

The bank said the move was in response to a “marked deterioration” in the economic outlook in the past two months, with inflation no longer seen as a threat. In a statement it said: “The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom. There has been a very marked deterioration in the outlook for economic activity at home and abroad.”

It added that residential investment had fallen sharply amidst a sharp fall in output for the general economy. It also said that, despite inflation currently residing at 5.2%, there was a significant risk that, with oil prices plummeting, inflation would fall below its 2% target next year.

Brian Berry, external affairs director at the Federation of Master Builders, said the move was great news. He said: “It’s very similar to what we asked for – they could have gone to 2%, but 1.5% is better than expected.” He added the drastic move only underlined the seriousness of the economic situation in the construction industry.

Estate agents have been quick to praise the move as a welcome boost to the housing market, but warned it would only have an impact if banks and building societies passed on the benefits of the cuts.

Nick Leeming, director at propertyfinder.com said: “Today’s cut is a brave move by the MPC and should begin to make a difference. 1% was the minimum cut we needed so this move is definitely going to help, but we want to see further action in the coming months.”

Ross Bowen, managing director of estate agent Connells Survey & Valuation, said: “The MPC has shown real commitment to stimulating the economy. It’s now crucial that lenders pass this unprecedented 1.5% rate cut onto borrowers. Consumers must see the benefit of looser monetary policy if we’re to avoid the worst ravages of recession.”