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Bank of England cuts benchmark rate to 5.5%

LONDON – THE Bank of England has cut its benchmark interest rate for the first time in two years, saying inflation is likely to slow as higher credit costs hurt economic growth.

However, the European Central Bank in Frankfurt left interest rates unchanged at 4 per cent, as policymakers weighed the risks of accelerating inflation against signs of slowing economic growth.

In London, the Bank of England’s nine-member Monetary Policy Committee, led by governor Mervyn King, reduced the bank rate by a quarter-point to 5.5 per cent.

‘Conditions in financial markets have deteriorated, and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead,’ the bank said in a statement accompanying its decision in London yesterday.

The slowest services growth in four years and surging money market rates led Bank of England policymakers to set aside concerns about faster inflation expressed just last week by Mr King.

With consumer confidence at its lowest since 2004, banks, including Morgan Stanley, say house prices may decline next year.

‘This is likely to be the first of several rate cuts,’ said Mr James Knightley, an economist at ING Financial Markets, who changed his forecast yesterday and predicted a reduction.

Britain’s benchmark is still the highest among the Group of Seven industrialised nations.

Mr King signalled the bank was planning rate reductions last month when he forecast the economy would slow ‘sharply’ next year after expanding more than 3 per cent this year.

Yesterday’s decision followed rate cuts by the United States Federal Reserve, as policymakers tried to shield the economy from the fallout of the collapse of the US sub-prime mortgage market.

‘Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term,’ the bank said in its statement.

 

Source: BLOOMBERG NEWS (The Straits Times 7 Dec 07)

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