FXstreet.com (Barcelona) - The Bank of England has decided to cut its official bank rate 50 bp to 1%, at its February Monetary in order to support British economy in a context of a severe downturn.
The Bank observes the accentuated output decline in most developed countries in the last quarter of 2008, while growth in emerging economies come to a sudden slowdown, while the banking system remain weak and household consumption as well as business climate have deteriorated sharply.
The picture in the UK does not change substantially from the general one; output slumped in the 4Q while credit conditions have tightened further, and consumer spending remains weak, and businesses have reacted to the worsening outlook by running down inventories, cutting production and labour force.
Inflation has eased to 3.1% in December from levels about 5% some months ago, but the Sterling continues depreciating, which increases the costs of imports. The Bank expects inflation to fall below 2% in the second half of the year, on lower food and energy prices.
The Bank expects this move to have a significant impact on activity, together with lower commodity prices and a weak pound, while warns about the substantial risk of undershooting the 2% CPI inflation target in the medium term at the current Bank Rate level.