Bank of England Slashes Key Lending Rate to Lowest Since 1955

By Jennifer Ryan

Nov. 6 (Bloomberg) -- The Bank of England unexpectedly cut the benchmark interest rate by 1.5 percentage points to the lowest since 1955 as U.K. policy makers tried to limit damage caused by the worst banking crisis in almost a century.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate to 3 percent, the biggest single step in 16 years. The move was predicted by none of the 60 economists in a Bloomberg News survey.

``It's absolutely staggering and deeply impressive,'' said Brian Hilliard, director of economic research at Societe Generale in London. ``They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact.''

The seizure in credit markets has left Britain on the edge of its first recession since 1991, prompting a 50 billion-pound ($80 billion) bank rescue package from the government and a half-point emergency rate cut on Oct. 8.

Prime Minister Gordon Brown's administration stepped up pressure on commercial banks to pass on rate reductions to businesses and consumers struggling with higher food and fuel costs. Lloyds TSB Group Plc said its customers would feel the full impact of the central bank's reduction. Barclays Plc and HSBC Bank Plc said they had the matter under review.

``We really do expect them to pass cuts on now to customers,'' Yvette Cooper, a junior Treasury minister, said on Sky News. ``People around the country would expect that. They now need to see the benefits from the Bank of England today.''

Pound's Decline

The pound dropped immediately after the decision before rebounding. It traded at $1.6011 at 12:30 p.m. in London compared with $1.5868 before the decision.

Economists said policy makers may lower the key rate again in coming months, and opposition politicians said the size of today's move suggested the economy is in bigger trouble than most people think.

``The cut today from the Bank of England is an indication of the seriousness of the crisis we're facing,'' George Osborne, who speaks for the Conservative opposition on finance, told broadcasters. ``It is a confirmation we are in a very deep economic hole.''

Unions that fund Brown's ruling Labour Party said not enough is being done to ensure that banks step up lending. They praised the central bank's decision.

Union Pressure

``The real challenge is to ensure that these cuts are passed on to both business and mortgage customers,'' said Adam Lent, head of economics at the Trades Union Congress, which represents more than 7 million workers. ``Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving.''

Banks are attempting to rebuild balance sheets after losses and writedowns following the start of a worldwide credit squeeze last year. Earlier this week, HBSC Chief Operating Officer David Hodgkinson signaled not all rate reductions would be passed through to all customers.

``Building societies will do all they can to ensure that the cost of mortgage borrowing is as low as possible,'' said Adrian Coles, director-general of the Building Societies Association. ``However, the bank rate is just one of the issues that they have to consider.''

Global policy makers are escalating their response to the credit crunch after a coordinated round of rate cuts last month. The European Central Bank and Swiss central bank both trimmed their key rates by a half point today.

Global Declines

The Federal Reserve last month lowered its main rate to 1 percent, matching the lowest in a half century.

The Bank of England is working with the government to limit the fallout from what it calls the worst global banking crisis in almost a century. Brown last month brokered a takeover of HBOS Plc, the nation's biggest mortgage lender. Bank of England figures show financial institutions in the U.S. and Europe have suffered $2.8 trillion in securities losses from the crisis.

A global slowdown probably will drag down inflation, which accelerated to a record 5.2 percent in September. Falling commodity prices also may help. Wheat prices have plummeted, and a barrel of oil costs half of what it did in July.

``The risks to inflation have shifted decisively to the downside,'' the Monetary Policy Committee said in a statement after today's decision. Policy makers ``judged that a significant reduction in Bank Rate was necessary now in order to meet the 2 percent target'' for inflation.

`Painful' Recession

``They're admitting that this recession is going to be very painful and have a huge impact on inflation,'' said George Buckley, an economist at Deutsche Bank AG in London. ``This is obviously a lot of help but it remains to be seen how much gets passed through.''

Shares of Tomkins Plc fell the most in 16 years today after the U.K. maker of auto parts and building materials said markets have worsened ``considerably'' since the end of June. Bovis Homes Group Plc, the U.K.'s most profitable homebuilder, said today falling prices are hurting margins.

Manufacturing is in its longest contraction since 1980, while U.K. house prices fell an annual 14.9 percent in October, the most in at least 25 years, HBOS said today. Unemployment claims rose to the highest level in almost two years in September.

``There has been a very marked deterioration in the outlook for economic activity at home and abroad,'' the Bank of England said today. ``The availability of credit to households and businesses is likely to remain restricted for some time.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net