Provided by: Bank of England
Official Release: News Release

As expected the Bank of England lowered rates, the third cut since December as higher credit costs and the worst housing slump in 16 years threatened to push the economy into a recession. The policy members acknowledge that they have to balance high inflation, which is pushing a nine-month high with expectations of a prolonged contraction.

From the Release:

"In the Committee’s judgement, the balance of these risks to the inflation outlook in the medium term justifies a cut in Bank Rate this month. Credit conditions have tightened and the availability of credit appears to be worsening. While the recent depreciation in sterling will support net exports, the prospects for output growth abroad have deteriorated. In the United Kingdom, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year. This should help to keep domestic inflationary pressures in check in the medium term.

Against that background, the Committee judged that a reduction in Bank Rate of 0.25 percentage points to 5.0% was necessary to meet the 2% target for CPI inflation in the medium term."

"Sentiment in international credit and money markets appeared to have deteriorated over the month. Term interbank spreads had risen in the US and UK money markets, probably reflecting heightened concerns about counterparty credit risk.

Provided by: Bank of England

The Bank of England held rates steady at 5.25% after lowering rates 25 basis points in February. The UK economy is facing signs of slowdown, and its housing sector is experiencing weakness as a result of higher credit costs, and falling prices. However, concerns over near-term inflation pressures, and more important, longer-term inflation expectations, were the overriding factors in the Monetary Policy Committee's decision. 

The GBP/USD rose following the news, and regained the $2 mark. It set a new high at $2.0094 as of 11:30 AM EST. Expectations are that the Bank will follow a gradual path in lowering rates, as a combination of higher rates and a slowdown in overall growth will mitigate inflation. As long as the economy doesn't turn down drastically, the Bank will focus on containing inflation expectations over the long term.   

Minutes of the Monetary Policy Committee Meeting
Held on 6 & 7 February 2008
Provided by: The Bank of England

The Bank of England Meeting Minutes reveal that David Blanchflower voted for a .50% reduction in the Bank Rate compared to the other 8 board members, that voted for a .25% reduction. The Bank is expecting inflation to rise sharply in the short term.

"CPI inflation, at 2.2% in January, was close to the 2% target. But the Committee expected that higher energy and food prices would raise inflation, possibly quite sharply, in the coming months. Producer input and output prices were already rising rapidly and the decline in the sterling ERI would boost import costs further. The impact of these short-term pressures on CPI inflation was likely to fade later in 2008, so that inflation was likely to fall back towards the target. But measures of inflation expectations had not fallen in line with actual CPI inflation following its peak during 2007. There was a risk that above-target CPI inflation in the near term would affect inflation expectations, and hence have some tendency to persist in the medium term.

Given this outlook for inflation, the Committee noted that some slowing of demand growth, by reducing the pressure on capacity, was likely to be necessary to return inflation to target in the medium term. The Committee needed to balance the risk that a sharp slowing in activity would pull inflation below the target in the medium term against the risk that elevated inflation expectations would keep inflation above target. Changes in Bank Rate could not be expected to smooth out all short-term fluctuations in output growth.

For a majority of Committee members, balancing these key risks required an immediate reduction in Bank Rate of 25 basis points. Interest rates were probably still bearing down on demand, partly because higher market spreads meant that the level of Bank Rate consistent with any given monetary stance was lower than it had been before spreads had widened. The February Inflation Report, and its accompanying projections, would set out in detail the upside and downside risks to the outlook for inflation. The central projection suggested that there was most likely to be some spare capacity in the economy, even if interest rates followed the path implied by market yields. That would therefore help to ensure that inflation returned to the 2% target in the medium term."

News Release from the Bank of England

"The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.25%.

The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the United Kingdom, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased. Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect. These developments pose downside risks to the outlook for inflation.

CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months. And the lower level of sterling will boost import costs. The impact on inflation should begin to fade later in the year, but measures of inflation expectations are currently elevated. These developments pose upside risks to the outlook for inflation further ahead."

"There had been a considerable amount of news over the past month that was relevant to the outlook for demand and inflation. At the time of the November Inflation Report, the Committee judged the risks to growth to lie on the downside and the risks to inflation to be balanced. Since then, the data outturns had been broadly in line with the November Inflation Report projections for output and activity, but the downside risks to future demand had increased, reflecting the outlook for UKweighted global demand and credit conditions. However, the upside risks to inflation from supply-side developments had increased in each of the past two months, largely reflecting changes in food and energy prices and the exchange rate."

"For most members, no change in Bank Rate was necessary this month. The short-run inflation outlook had worsened markedly... Reductions in Bank Rate in two successive months might, given the current conjuncture, encourage observers to think that the Committee was focused more on stabilising demand than meeting the inflation target and so shift the yield curve down further. The Committee would be able to use the February forecast round to assess the medium-term outlook for inflation, and the impact on that of both the upside risk to inflation in the short term and the downside risk to demand and activity."