London, Feb. 6 (Bloomberg) -- The Bank of England unexpectedly cut its benchmark rate to the lowest level since 1955, Winston Churchill's last year as prime minister, in an effort to spur growth in Europe's second-largest economy. Governor Sir Edward George and his eight colleagues on the bank's Monetary Policy Committee reduced the securities repurchase rate by a quarter point to 3.75 percent at their monthly meeting. The European Central Bank kept its rate at 2.75 percent. ``Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated,'' the Bank of England said in a statement. The reduction was the first since November 2001.
Britain's economy grew 1.7 percent last year, the slowest pace in a decade. Services industries, the largest portion of gross domestic product, are slowing and manufacturing orders are shrinking. The cut follows half-point reductions by the European Central Bank and U.S. Federal Reserve late last year. The ECB, which sets monetary policy for the dozen nations sharing the euro, kept its rate at the lowest in three years. The U.K. is one of three European Union nations not to swap its own currency for the euro.
Notes Surge
Government debt surged. The yield on the 6 3/4 percent U.K. note maturing in November 2004 declined 22 basis points to 3.37 percent. A basis point is 0.01 percentage point. The pound fell to as low as 1.6454 per dollar, from 1.6472 before the rate decision. The Bank of England may cut rates again as soon as April, said Ciaran Barr, chief U.K. economist at Deutsche Bank AG, who was alone among the 29 economists surveyed by Bloomberg News to predict today's move. ``There are worries about a prolonged war with Iraq,'' he said. Investors are counting on another cut, futures trading suggests. The rate on a three-month sterling deposit maturing in June fell 26 basis points after the decision to 3.45 percent. HSBC Holdings Plc, Lloyds TSB Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc cut their base lending rates to 3.75 percent from 4 percent, matching the central bank's move.
The FTSE-100 index has declined 7.5 percent this year after shedding 24 percent last year. Dixons Group Plc, Europe's second- largest electrical retailer, said fiscal 2003 earnings will barely grow as shoppers pare spending. Imperial Chemical Industries Plc, the country's largest specialty chemical maker, said today it's cutting more jobs to reduce costs. ``Manufacturing appears to be sliding back into recession after some tentative signs of recovery towards the end of 2002, and the consumer is turning more cautious,'' said Simon Rubinsohn, chief economist at Gerrard Ltd. in London, which manages 17 billion pounds ($27.3 billion).
Slowing Inflation, Growth
The central bank will publish its quarterly forecasts for economic growth and inflation next week. In its November report, policy makers predicted inflation, which was 2.7 percent last month, will exceed its 2.5 percent target for much of the year. ``Inflation has, as expected, moved a little above target, but this is the result of temporarily large contributions from petrol prices and from housing,'' the bank said in the statement. ``These influences on inflation will persist for some time but are expected to unwind further ahead.'' Seven rate reductions, by a total of 2 percentage points, in 2001 encouraged shoppers to boost spending and led to a surge in house prices. Dwelling costs increased at the fastest pace in January since records began in 1991, according to Nationwide Building Society, the country's fifth-largest mortgage lender. Gross domestic product rose 0.4 percent in the fourth quarter, compared to 0.9 percent in the previous three months. Germany, Europe's largest economy, stagnated at the end of last year, the government has estimated. W.H. Smith Plc, Britain's biggest bookseller, said last week its Christmas sales fell. Allied Domecq Plc, the world's second- largest liquor maker with brands such as Beefeater gin, said this week that profit growth will stall this year. //www.quote.bloomberg.com