Bank cuts interest rate to 3.5%

MERVYN King ensured his debut as chairman of the Bank of England's monetary policy committee went with a bang today as interest rates were unexpectedly cut for the first time in five months.

The quarter-point reduction in the base rate to 3.5% follows mounting evidence that High Street spending and the housing market, the economy's main props, are slowing. The cost of borrowing is now at its lowest since 1955.

In a statement, the Bank said: 'The global economic recovery has remained hesitant. Although the preconditions for recovery remain in place, the prospect for external demand for UK output is weaker than expected.'

It added that sterling's fall since the start of the year should underpin growth, but that its recent recovery would keep inflation under control.

'Against that background, and given the possibility of subdued economic activity continuing in the near term, the committee judged that a reduction in official interest rates to 3.5% was necessary in order to keep inflation on track to meet the target in the medium term.'

Shares were unfazed, but sterling dived, falling more than a cent against the dollar to a five-week low of 1.6227.

Interest rate futures rallied. The Bank's timing wrong-footed City pundits, the majority of whom had predicted the monetary policy committee would sit on its hands today.

While further rate cuts had not been ruled out, most had expected the MPC to wait until it had revised its forecasts ahead of next month's quarterly Inflation Report.

Business leaders praised the Bank for the bold decision. The CBI's chief economist Ian McCafferty said: 'The Bank's move will help support the economy, which has lost momentum this year, and provide further insurance against the still-evident downside risks of anaemic global growth.'

The European Central Bank today left its key interest rate unchanged at 2%, as expected.