Interest rates cut to 4 per cent

The Bank of England has cut interest rates to 4 per cent, their lowest level since 1964, in an effort to protect the British economy from a global slowdown.

The Monetary Policy Committee announced the half-point cut on 8 November, the seventh reduction this year. Rates stood at 6 per cent at the start of 2001.

Why the cut?

The world economy has been slowing throughout the year, as the technology boom has turned to bust and businesses have cut back on investment. The terrorist attacks on the United States on 11 September have added to the uncertainty.

The American economy is thought to be in recession, and the central bank there, the Federal Reserve, has cut its rates sharply. The European Central Bank has also cut its rates today.

The Bank of England said the outlook for the world economy had weakened and that the risks to growth in Britain had increased.

Good news for borrowers

The cut will be welcomed by homeowners with mortgages, who will see their monthly payments fall if banks and building societies pass on the reduction. Businesses will also benefit from cheaper borrowing.

Savers, however, will earn less interest on their deposits, and many pensioners who rely on savings income will be worse off.

A two-speed economy

Britain's economy has held up better than many others, thanks largely to spending by consumers. The housing market remains strong, and unemployment is low.

But manufacturing is struggling. Factories have been hit by the strength of the pound, which makes British goods more expensive abroad, and by falling demand from overseas. Thousands of manufacturing jobs have been lost this year, including in the Midlands.

Airlines and tourism have also been hit hard since the September attacks.

Independent Bank

The Bank of England has set interest rates independently since 1997, when the Chancellor, Gordon Brown, handed it the power. Its target is to keep inflation at 2.5 per cent.

Inflation is currently below target, which has given the Bank room to cut rates.

More cuts?

Some economists believe rates could fall further if the global slowdown deepens. Others think the Bank may now wait to see the effect of the cuts it has already made.