Bank of England Cuts Interest Rates to 0.5%

Plans to Create £75bn to Help Revive the Economy

Mar 5, 2009

The Bank of England cut interest rates on 5 March 2009 to 0.5%, down from 1%. Plans were also unveiled to buy £75bn worth of assets to help revive the economy.

On Thursday 5 March 2009, the Bank of England cut interest rates to a new all-time low of 0.5%. The cut, down from 1% was expected due to the worsening prospects for the British economy, and also due to the growing threat of deflation.

£75 Billion Investment to Help Revive Economy

The big decision though, also announced on 5 March, was the decision for the Monetary Policy Committee (MPC) to start pumping money into the economy through the purchase of £75 billion worth of assets. The governor of the Bank of England, Mervyn King, said the move was about putting money into the wider economy, rather than just giving it to the banks.

The MPC has stated that it did not believe that the interest rate cut alone would be enough to help the economy, so it decided to take further action. Over the next three months, the MPC will buy private sector assets, government bonds and also medium to long-term maturing gilts.

It is hoped that by buying up these assets, the Bank of England will be able to prevent inflation for as long as possible, and also provide more funds to lenders, to try to encourage more lending by the public.

Alastair Darling, the Chancellor, agreed that the interest rate cut would be another blow to savers who now face another drop on the returns from their savings, but he also said that the cut was vital in encouraging the revival of the struggling economy.

Quantitative Easing

The move to invest £75 billion, is part of quantitative easing process. Quantitative Easing is a process when more money is put into general circulation to aid the recovery of the economy. Initially, the Bank of England will introduce £75 billion into circulation, however Alastair Darling has given the go-ahead for this sum to be double to £150 billion if needed. The idea behind quantitative easing is that by increasing the amount of money in the system, then it will make lending easier for commercial banks.

Quantitative easing should not be simply seen as "printing money". The Bank of England will not print more bank notes, instead it will buy more assets.

Controversy Over Interest Rate Cuts

A number of business groups have complained about the recent interest cuts, saying that they have done very little in encouraging lending by banks. Some other argue that the rate cuts are unfairly harming savers.

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