LONDON, Aug 4: The Bank of England (BoE) cut its key interest rate by a quarter of a percentage point to 4.50 per cent on Thursday, citing possible inflationary risks and subdued economic growth during the first half of 2005. Economists had widely expected the nine-member Monetary Policy Committee (MPC) to implement a cut, the first since July 2003 when rates fell to 3.50 per cent — the lowest point in almost 50 years.

The European Central Bank shortly afterwards held the minimum bid rate for its regular refinancing operations steady at 2.00 per cent, where it has been since June 2003. The US Federal Reserve was meanwhile thought likely next week to continue raising the cost of borrowing from the current 3.25 per cent in a measured manner, possibly to 4.0 per cent by the year’s end.

In a statement accompanying its decision, the MPC said it “judged that a decrease of

0.25 percentage points in the repo rate to 4.5 per cent was necessary to keep CPI inflation on track to meet the 2.0 per cent target in the medium-term”.

The MPC, which is to publish its latest inflation and output projections on August 10, said that high oil prices “may raise” inflation further in the short- term. British 12-month inflation, as measured by the consumer price index, hit in June the 2.0 per cent target which the central bank is charged with meeting by the government.

“In the first half of the year, output growth in the United Kingdom was subdued,” the Bank said at the conclusion of its regular two-day meeting.

“Household spending and business investment growth have slowed. Although there are some signs of a pickup in consumer spending, downside risks remain in the near term.

“Looking further ahead, however, the rise in equity prices and the recent fall in the (sterling) exchange rate should boost activity,” it added. An economist with the Canadian Imperial Bank of Commerce, Audrey Childe-Freeman, said that there was “nothing in the statement suggesting that another easing is on its way next month”, a view echoed by other analysts.

“Financial markets showed barely any reaction to the move,” Investec economist David Page noted. The “repo” rate — the rate of interest at which the BoE lends to commercial banks — had stood at 4.75 per cent since August 2004, when policymakers last raised rates.

The MPC carried out five quarter-point increase between November 2003 and August last year in moves aimed at helping to cool consumer spending and Britain’s red-hot housing market.

British high street banks meanwhile mirrored the BoE, by cutting their home-loan lending rates by 0.25 percentage points. “The market debate will now quickly shift to whether the MPC will deliver a swift follow-up in September,” Calyon analyst Daragh Maher said.

“At the very least, the market will have to move back to the idea of the base rate reaching 4.25 per cent before year-end.”

The Confederation of British Industry said on Thursday’s reduction would provide a “catalyst” for growth and provide an “essential” boost to consumer and business confidence.—AFP