9 Oct 2008

World central banks cut interest rates

3:34 pm on 9 October 2008

Six central banks, including the Bank of England, have cut their interest rates by half a percentage point in an effort to steady the global economy.

No decision on British rates had been expected until Thursday - and the move puts the interest rate at 4.5% from 5%.

The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank trimmed its rate from 4.25% to 3.75%.

The unprecedented, co-ordinated move came amid slumping world stock markets.

The central banks of Canada, Sweden and Switzerland all took similar action. China also cut its rate by 0.27 percentage points. The Bank of Canada's new rate is now 2.5% and Sweden's bank rate is 4.25%.

European financial markets reacted well, pulling back some of the losses seen earlier on Wednesday.

The coordinated cuts followed a rate reduction by the Reserve Bank of Australia on Tuesday from 7% to 6%.

The last time the Bank of England cut rates in a special meeting was on 18 September 2001 - when rates came down from 5% to 4.75%.

The Bank of England's Monetary Policy Committee said that getting inflation down to the government's 2% target remained its goal. Latest data puts inflation at 4.7%, and the MPC said it is likely to rise above 5% in the coming months.

The Bank of Japan did not cut its rate - which is 0.5% - but expressed its "strong support" of the policy.

The US Federal Reserve has now cut rates from 5.25% in September last year.

British rescue plan

The British government on Wednesday announced details of a rescue package for the banking system worth at least Stg50 billion.

It will make extra capital available to eight of the United Kingdom's largest banks and building societies. In return for the funding, the government will receive preference shares in those institutions.

A further Stg200 billion will be made available by the Bank of England for short-term borrowing to provide liquidity to banks and building societies.

The banks that have confirmed they will take part in the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

The Treasury said that other banks would be able to apply for inclusion in the plan.

The government will require banks to meet certain terms and conditions that will include banks making commitments to support small businesses and home buyers and to deal with what many see as unfair pay deals for bank executives.