The Bank of England on Thursday dropped its benchmark interest rate to the lowest level since the central bank's founding in 1694, as policy makers fired yet another salvo in the battle against a deep and potentially lengthy recession.
The rate-setting Monetary Policy Committee cut the bank rate to 1.5% from 2%. A majority of economists had expected the half-point rate cut, while several had predicted a reduction by three-quarters of a point or a full point.
"The world economy appears to be undergoing an unusually sharp and synchronized downturn," the MPC said in a statement announcing the decision.
"Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time," the bank said.
The committee's decision last month to cut the key lending rate by a full percentage point to 2% matched the all-time low for the benchmark.
The committee said that the recent easing in monetary and fiscal policy, as well as the pound's recent sharp fall and an expected decline in inflation, "would together provide a considerable stimulus to activity as the year progressed."
Nevertheless, there was still a "significant risk" that inflation would undershoot the bank's 2% annual target if the key rate was left at 2%, the bank said.
Policy makers also noted a worsening outlook for business and residential investment, and observed that credit availability for households and businesses had continued to tighten, "pointing to the need for further measures to increase the flow of lending to the non-financial sector."
Minutes of the meeting will be published on Jan. 21.
The pound extended gains against the euro following the announcement and traded recently at 89.16 pence, a gain of 1.3% against the single currency. Sterling erased a loss versus the U.S. dollar to change hands at $1.5202, up 0.6% on the day.
British equities were little moved by the decision. The FTSE 100 stock index remained 1.3% lower. See London Markets.
With official interest rates approaching zero, speculation has heightened that the central bank and British government may soon feel compelled to undertake a range of extraordinary measures -- figuratively printing money in an effort to stave off the threat of deflation.
Meanwhile, many economists said the central bank had little choice Thursday other than to cut rates again.
Since the committee's previous rate cut on Dec. 4, data showed unemployment rose quickly to top the one-million mark in November, retail sales measures have reflected a gloomy Christmas season and gauges of activity in the manufacturing and services sectors continue to point to sharply contracting activity.
And the beleaguered British housing sector accelerated its slump in December, according to separate house-price indexes produced by mortgage lenders Halifax and Nationwide.
Also, the Office for National Statistics revised third-quarter gross domestic product data to show a 0.6% quarterly contraction after an earlier estimate showed a 0.5% fall. That's expected to be followed by a deeper contraction of around 1% in the fourth quarter, said Howard Archer, chief U.K. and European economist at IHS Global Insight.
Meanwhile, the inflation threat that had led the MPC to pause on the rate-cutting path from April to October of last year has been replaced by the specter of deflation, or a broad and persistent fall in prices of goods and services.
The phenomenon can be detrimental if it leads to a deflationary spiral.
But economists have also noted that despite massive government investment in the banking sector and aggressive cuts in interest rates by the Bank of England, lenders have continued to tighten the supply of credit to households and businesses.
Mortgage approvals remain at a record low.
The Bank of England has faced criticism from some quarters, meanwhile. Critics argue that sharp cuts in interest rates have hit savers hard while doing little to boost the credit supply.
Also, concerns about the beleaguered British pound were also seen potentially limiting the scope for a move by the central bank. Sterling ended 2008 on an exceptionally weak note, falling to near parity with the euro.
While the currency has rebounded from those lows, economists said the threat of a run on the pound remains a cause for concern, particularly as the government seeks to finance a sharp rise in public borrowing.
