Surprise interest rate reductions

Lowest levels for over 50 years

Interest rates were cut to their lowest level in over 50 years on Thursday 6 November when the Bank of England cut its official rate by 1.5 percentage points to 3 per cent, a cut three times larger than any seen since the Bank’s Monetary Policy Committee was established in 1997. This was followed by another 1 per cent reduction on Thursday 4 December, bringing the rate down to 2 per cent, a level not seen since 1951, when Winston Churchill was in office.

The Monetary Policy Committee explained its decision to cut rates far more than expected by saying there was evidence of a ’severe contraction’ in the economy during the coming months, and such a dramatic extinction of inflationary pressure that ’at prevailing market interest rates, [there is] a substantial risk of undershooting the inflation target.’ Traders and most economists took that to mean further rate cuts were likely to come.

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