Banks under pressure to pass on rate cut

The Bank of England's decision to cut rates to a low not seen since 1951 has increased pressure on the banks to pass on the benefits to their customers.

The base rate now stands at 2 per cent following the Bank of Englandπs move to shave a further 1 per cent off the cost of borrowing.

The decision was not unexpected, with a new raft of data showing the UK economy headed for a deeper and more protracted recession than had been feared.

The Prime Minister, Gordon Brown called on the high street banks to hand the cut on to both homeowners and businesses.

He also argued the case for yet further cuts in the future, saying: "Interest rates could continue to come down. If you've got a period when inflation comes down, you've got to do different things."

Businesses welcomed the move, although some echoed Mr Brown in urging banks to pass on the cut.

David Cavell, the banking adviser to the Forum of Private Businesses, said: "This further cut in the rate of interest is pleasing. I certainly hope that it will be very quickly reflected in both market rates and in the cost of borrowing being offered by banks to small businesses."

It was a view backed up by Ian McCafferty, the CBI's chief economic adviser, who commented: "The economy needs a significant monetary stimulus and the Bank has clearly decided this will be best achieved by another big cut in interest rates. What is critical for business and consumers alike is that this reduction is passed on.

"The economy is stalling, inflation is expected to undershoot the Bank's own target and the headline RPI rate of inflation is likely to turn negative for at least a few months in 2009. We need to see lending improve and to keep business working."

David Kern, the chief economist at the British Chambers of Commerce (BCC), said: "We are pleased with the MPCπs decision to cut interest rates by one per cent. The less than impressive reaction to the PBR, and worrying signs that UK activity is falling sharply, make it critically important for the MPC to persevere with aggressive rate cuts. The UK economy faces serious risks.

"There is a clear danger that unemployment will increase even more dramatically without urgent counter-measures. We strongly urge the MPC to cut interest rates by at least a further half per cent at its January meeting."

Stephen Robertson, director general of the British Retail Consortium, agreed: "This is exactly the type of decisive action we need during these uncertain times. With the threat of inflation fading, the Bank of England is right to concentrate on jump starting the economy.

"Decisions now will greatly influence how long and deep the recession is. The Bank's job is not done. It must continue to cut rates in the New Year to get the economy heading in the right direction again."