'Bold' rate cut wins a welcome in the City

The Bank of England slashed rates from 4.5% to a 54-year low of 3% in its most dramatic move since it was granted independence in 1997.

The European Central Bank reduced interest rates in the eurozone from 3.75% to 3.25%, and the Swiss National Bank cut for a second time in a month, from 2.5% to 2%.

But it was the UK move that electrified the City, where analysts had expected a cut of one percentage point at the most, to 3.5%.

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

The Bank's monetary policy committee, led by Governor Mervyn King, said higher inflation was no longer a threat as it turned its guns on falling economic output.

It said it expected inflation to "drop back sharply" from the current rate of 5.2% to below the target of 2% as energy and food prices fall. At the same time, it warned of "a very marked deterioration in the outlook for economic activity at home and abroad".

Graeme Leach, chief economist at the Institute of Directors, said: "This is a bold and aggressive move by the MPC and just what the economy needs. It shows that the MPC think inflation is yesterday's story and deflation is the risk for tomorrow.

"We think interest rates could touch record lows of 2% or less by this time next year. The sooner we get interest rates down, the less is the risk of a long and deep recession."

Trevor Williams, chief economist at Lloyds TSB, said: "This is an extraordinary cut, a clear sign that the Bank's one and only priority is reversing the recessionary tide. Inflation seems no longer to be a concern. Further rate cuts cannot be ruled out."

The pound tumbled against the dollar in the immediate aftermath of the rate cut but recovered some ground as the shock wore off, to be down 0.9 of a cent to $1.596. The weak FTSE 100 rallied shortly after the midday move before cementing earlier losses, falling 86.06 points to 4444.67.

Joshua Raymond, market strategist at City Index, said: "We immediately saw the FTSE 100 spike up but any gains made were quickly given up as the shock cut was digested. We also saw sterling immediately lose ground before coming back. The fear is now that the situation could be much more dire than first perceived.

"Cutting rates is comparable to a double-edged sword and the right balance must be struck between being too aggressive, which can undoubtedly exacerbate fears, or too impotent, which will disappoint. Today's action looks to be the former."

Bank critics said the move smacked of panic, and proved the MPC should have acted earlier.