The announcement comes as the threat of inflation diminishes, and Britain’s recession crisis deepens.
Rates have not dropped below 2 per cent in over 300 years. The Bank’s move is partly intended to stimulate consumer spending, by reducing the cost of borrowing.
It means credit becomes cheaper.
This will stimulate the economy by improving business performance. Some liken it to ‘oiling the wheels of motion’. A public unwilling to spend is blamed by some as the main cause of the recession.
However, many mortgage providers have said they will not pass on the full extent of any interest rate cuts to policy holders.
The bank also has to avoid further devaluing of Sterling. This makes imports more expensive – a real issue for car manufacturers, as the pound slides against the Euro.
This could make some models more expensive.
Furthermore, Britain is now threatened by deflation. The RPI index is expected to turn negative, with the CPI index doing the same in a few month’s time.
Deflation increases the value of loans – and customers know that, if they don’t buy today, it will be cheaper tomorrow.
The housing market is an illustration of this.
It means buyers may still not return to showrooms, if they sense money markets still have further to move.