Bank of England cuts rates to record low

LONDON, March 5 (Chinese media) -- Bank of England, Britain's central bank, announced today it will cut interest rates from 1 percent to 0.5 percent, a new record low, with the aim of reviving the British economy.

The bank said it will adopt a "quantitative easing" monetary policy to create 75 billion pounds (about 105 billion U.S. dollars) to buy government bonds and company securities in an attempt to boost bank lending. The bank expects it will take up to three months to carry out this programme.

But letters between Chancellor of the Exchequer, Alistair Darling, and Bank of England governor, Mervyn King, suggest that this could be increased later on. King asked for permission to create up to 150 billion pounds (210 billion U.S. dollars) in new funds, 100 billion (140 billion U.S. dollars) used to buy government bonds and the rest for company assets.

As the British economic recession deteriorates, a further reduction of interest rates will probably only have a limited overall positive impact.

"The lack of credit availability remains a very serious impediment to economic activity and recovery hopes, so the Bank of England is looking to significantly help matters by boosting the money supply through quantitative easing, Howard Archer, chief UK and European economist of IHS Global Insight, said.

"Quantitative easing is clearly now going to be at the forefront in the BOE's ongoing efforts to stimulate the economy. While we would not rule out a further interest rate cut given the ongoing deep travails of the economy and the substantial risk of extended below-target CPI, we suspect that 0.5 percent will market the floor in interest rates. The interest rates seem likely to remain at 0.5 percent until well into 2010," he said.

According to the UK National Statistics Office, the British economy contracted 1.5 percent in the fourth quarter of 2008. The UK economy entered recession in late 2008 and it is the first time for the UK to suffer a recession in nearly 20 decades. Standard Chartered forecast that the British economy would contract 2.9 percent for the whole of 2009.