BoE slashes interest rates to 57-year low

The Bank of England on Thursday slashed its key interest rate by a full percentage point to 2.0 percent, the lowest level in more than half a century amid mounting evidence Britain faces a deep recession.

The December rate cut follows a record 1.50 percent reduction in November, a dramatic effort to slow an accelerating slide into an economic slowdown that has been compared to the 1930s Great Depression.

The move prompted some economists to forecast that British interest rates could drop close to zero in 2009. Rates were last at 2.0 percent in the years 1939-51, held there during World War II and into the recovery period afterwards.

"In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace," the Bank of England (BoE) said in a statement following a two-day meeting of its monetary policy committee (MPC).

The Council of Mortgage lenders welcomed the decision although it said the cut would not be passed on to all home owners.

"This will help the wider economy, even if it cannot be reflected universally in lower mortgage rates. Where lenders feel they can reduce mortgage rates, they will," it said in a statement.

The BoE rate call came shortly ahead of a move by the European Central Bank to cut its key lending rate by 0.75 percentage points to 2.50 percent for the 15-nation eurozone which is already mired in recession.

The pound recovered after the bank's decision, having hit a record low against the euro in morning trade on anticipation of a steep BoE rate reduction.

Central banks around the world have been slashing interest rates as the impact of the global financial crisis puts the brakes on economic growth, with Australia, New Zealand and Thailand acting earlier this week.

The BoE said that consumer price inflation was forecast to fall even further in the coming months, in line with sharp falls for energy and food costs, allowing greater room for manoeuvre.

"Inflation is likely to continue to drop back as the contributions from retail energy and food prices decline," said the BoE, whose chief task is to keep 12-month inflation close to a 2.0 percent target.

The consumer price index came off a 16-year high of 5.2 percent in September to 4.5 percent in October as the cost of oil fell sharply, raising some concerns the country risked equally damaging deflation -- a prolonged period of falling prices.

"At its December meeting, the (Monetary Policy) Committee judged that ... there remained a substantial risk of undershooting the 2.0 percent CPI inflation target in the medium term," the BoE said.

"Accordingly, the Committee determined that a further reduction ... of 1.0 percentage points to 2.0 percent was necessary in order to meet the target in the medium term."

Investec Securities economist Philip Shaw said the BoE could slash borrowing costs near to zero percent as it seeks to kick-start the economy next year.

"We are of the view that the MPC will bring rates down close to zero by the spring to maximise the amount of stimulus from interest rate policy and to provide banks with cheap and plentiful central bank liquidity," Shaw said.

"We are working on an assumption that the minimum feasible level of official rates lies somewhere between 0.50-0.75 percent, and that the Bank rate reaches 0.75 percent in the second quarter."

The BoE's November 1.5 percentage point rate cut was the biggest since 1981, shocking markets around the world.

Since last month's decision, however, official data has confirmed that the economy shrank 0.5 percent in the three months to September. A second consecutive quarterly contraction would put Britain in recession.

Mark Priest, senior trader at spread betting company ETX Capital, said that the BoE's December cut would help prevent more economic pain.

"This is just what the doctor ordered -- an aggressive cut to head off a worsening downturn," Priest said.

Ahead of Thursday's rate decision, a raft of bad economic data hit investors' trading screens.

The pound fell under 1.15 euros for the first time and home loan provideer Halifax said house prices slumped by a record 14.9 percent in the three months to November.

It was also announced that sales of new cars in Britain plunged at the fastest rate -- 36.8 percent -- for more than 28 years in November.

Last week, the government launched an economic stimulus package of 20 billion pounds in a bid to spark fresh consumer spending and fight back against the downturn.

1. The Bank of England website