BoE lowers rate to 5% on recession risk

The Bank of England (BoE) today cut the benchmark interest rate for the third time since December as higher credit costs and the worst housing slump in 16 years threatened to push the economy into a recession.

The Monetary Policy Committee, led by Governor Mervyn King, lowered the bank rate by a quarter point to 5 percent, as predicted by 52 of 61 economists in a Bloomberg News survey. The rest forecast that it would remain at 5.25 per cent.

Former Chancellor of the Exchequer Nigel Lawson said yesterday Britain was headed for a "prolonged'' recession as the seizure in credit markets prompt banks to choke off the cheap loans that fuelled a decade-long boom in consumer spending. The slowdown has encouraged policy makers to keep up the pace of rate cuts and set aside concerns about inflation, which reached a nine- month high in February.

"Credit conditions have tightened and the availability of credit appears to be worsening,'' the Bank of England said in a statement today. Slower economic growth this year "should help to keep domestic inflationary pressures in check''.

The pound was little changed after the decision at 80.24 pence per euro.

The currency has dropped 19 per cent since September as investors reined in their growth estimates for the UK economy. It fell to a record 80.29 pence earlier today.

At 5 per cent, the Bank of England's benchmark rate is the highest among the Group of Seven industrialised nations. The European Central Bank will keep its benchmark rate at 4 per cent today, all 67 economists in a Bloomberg survey predict. The bank announces its decision at 1:45 pm in Frankfurt.

Behind the curve
The Bank of England's move follows criticism from former policymaker DeAnne Julius that the central bank was slipping "behind the curve'' on rates.

The International Monetary Fund yesterday said the UK growth will slow to 1.6 per cent this year from 3.1 percent in 2007, the worst performance since the end of the last recession in 1992.

The rate cut may not be enough to prevent growth from deteriorating in coming months.

"We are probably facing a recession of some sort in the western world,'' Lawson, who served as finance minister from 1983 to 1989, said in an interview. "Not a severe recession, but in the U.S. and U.K. one that might be quite prolonged.''

DSG International, the biggest UK consumer electronics retailer, said today earnings may drop 32 percent this year amid "challenging'' business conditions. House prices declined 2.5 percent in March from a month earlier, the biggest drop since 1992, mortgage lender HBOS said on April 8.

Global response
The world's central banks are responding differently to the credit crisis, which comes as higher food and oil prices stoke inflation. The US Federal Reserve has lowered its key rate 3 percentage points since September to 2.25 percent, while the ECB has refused to cut borrowing costs since markets seized up in August because inflation is above its ceiling.

Iceland's central bank today unexpectedly raised its benchmark rate to a record 15.5 percent to shore up the krona and damp inflation that is running at three times the target.

King said March 31 it's ``crucial'' the central bank prevents excessive price expectations becoming entrenched and inflation may exceed the government's upper 3 percent limit. Consumer prices rose 2.5 percent in February from a year earlier after gas and electricity prices rose. Oil prices climbed to a record $112.21 a barrel in New York yesterday.

"Inflation is still a concern and that means the bank will ease gradually,'' said Sharratt. ``A move every other month seems a plausible pace.''

Growth move
There are also indications that growth is holding up better than some economists forecast. Retail sales rose for a second month in February, unemployment is at the lowest since 1975, and manufacturing in February unexpectedly climbed to the highest level in seven years.

Prime Minister Gordon Brown, whose reputation for economic competence is threatened by the housing slump, has indicated that price pressures aren't strong enough to stand in the way of action by the Bank of England to help the economy.

"We can cut interest rates'' because inflation is ``low,'' he said in an interview with BBC News 24 on April 8.

While Brown helped extend the economy's longest period of uninterrupted growth for two centuries during his 10 years as finance minister, a poll by Populus on April 8 showed his approval rating fell to the lowest since he succeeded Tony Blair in June.

UK growth is slowing after contagion from the U.S. subprime mortgage market slump spread. The IMF predicts the crisis will cause $945 billion in losses, and with banks reluctant to lend, the Bank of England is struggling to steer mortgage borrowing costs with its benchmark rate.

"The credit crunch has been with us for eight months and isn't getting any better,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Group. "The Bank of England has to steer a course between inflation and the real economy. It's not easy.''