Drastic Rate Cut -- the Right Move?

Last Updated Nov 6, 2008 8:11 AM EST

Interest rates have been drastically slashed by 150 basis points to three per cent -- the lowest rate since 1954. The shock move met with mixed reactions from economists. Five of the Times's 'shadow' MPC members called for a full-point cut ahead of the decision.

Hetal Mehta, the senior economic adviser to the Ernst & Young ITEM Club, believes it's the right move -- "anything less would have been a missed opportunity."

The CBI's director-general, Richard Lambert, has called it a "bold and welcome" decision that should "allow banks to pass the benefits on to their customers".

But it's unlikely that the full cut will be passed on to borrowers -- banks may well say they cannot afford to pass on the move to customers, and around 51 per cent of UK borrowers have fixed-rate deals anyway. The cost of borrowing is now such that it doesn't make sense to pass on cuts to borrowers, according to a spokesperson for the Council of Mortgage Lenders.

Lloyds TSB has said it will pass on the full 1.5 per cent cut to variable rate mortgage customers, but it and Northern Rock pulled their tracker mortgages yesterday to reprice them.
It's too late to arrest UK house price declines, which fell 2.2 per cent in October, according to lender the Halifax -- the ninth successive drop and a record fall of14.9 per cent compared to a year ago.

Sterling dropped 0.4 per cent against the US dollar to $1.5813.

How low can they go? According to the Graeme Wearden at the Guardian, UK interest rates haven't been as low as two per cent since the days of rationing during World War II and post-war -- they were 2.5 per cent in 1951.

Graeme Leach, the chief economist at the Institute of Directors, believes rates could drop below two per cent by this time next year. "The sooner we get interest rates down, the less is the risk of a long and deep recession."

What do you think -- has the Bank of England acted quickly enough to stave off recession?