Bank of England drop interest rate to 3.75%

In a surprise move the Bank of England today cut interest rates by 0.25% taking the UK interest rate to 3.75%, the lowest figure in almost 50 years.

It was widely expected that, despite growing pressures from the UK manufacturing sector, the Bank's monetary policy committee would continue with its cautious 14-month-long approach and hold rates at 4%.

Advocates for a 'wait and see' strategy remain concerned that a cut in interest rates would fuel inflationary trends in a run away housing market and add to the record level of consumer debt in the UK.

However, in a statement the Bank's monetary Policy Committee said: "The Committee reviewed monetary and economic developments in the light of its latest quarterly projections for output and inflation, to be published in the February Inflation Report.

"RPIX inflation has, as expected, moved a little above target, but this is the result of temporarily large contributions from petrol prices and from housing depreciation. These influences on inflation will persist for some time but are expected to unwind further ahead.

"Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated. In order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to reduce interest rates by 0.25%."

The latest inflation and output projections will appear in the Inflation Report to be published next week.

The previous change in interest rates was a reduction of 0.5% to 4.0% on 8 November 2001.

The manufacturing sector have broadly welcomed the cut, though the CBI maintained that they had not been seeking an interest rate cut, preferring other measures to strengthen beleaguered manufactures in the UK.

The European Central Bank earlier announced that the eurozone rate would remain unchanged at 2.75%.

(SP)