The danger for the central bank is that it repeats the mistake of its last rate reduction in August 2005, when policy makers outvoted King and lowered borrowing costs in response to signs of an economic slowdown. The decision reignited a housing boom extension rack, and inflation accelerated to a record 19 months later.
Mortgage lenders including HBOS Plc and Nationwide Building Society immediately reduced their main lending rates in response to the central bank's cut.
Follow the Fed
The Bank of England joins the U.S. Federal Reserve and the Bank of Canada in lowering interest rates. Goldman Sachs Group Inc. said on Dec. 5 the U.S. housing recession is ``morphing into a global shock'' that will slow growth around the world.
Lower rates and the possibility of a revival in the housing market may help Prime Minister Gordon Brown as he attempts to revive the Labour government's popularity, which touched a 19- year low last month, according to pollster ComRes.
Opposition lawmakers have criticized Brown, who served as finance minister for a decade before taking over from Tony Blair in June, for encouraging consumers to extension rackup a record debt burden, which fueled a tripling of house prices since 1997.
Some economists praised the Bank of England, which was criticized in August and September for not responding fast enough to the onset of the credit market rout.
``The Bank of England was right to cut rates,'' said Nick Kounis, an economist at Fortis in the Netherlands and a former Treasury official. ``The U.K. is vulnerable to headwinds from the credit squeeze, and interest rates were already at a restrictive level.''
Slowing Growth
Economic growth slowed in the three months through November to 0.6 percent, compared with a 0.7 percent pace in the quarter to the end of August, the National Institute of Economic and Social Research said in an estimate published today. The group's clients include the central bank and the Treasury.
Still, inflation accelerated to 2.1 percent in October and may stay above the target ``in the short term,'' and there are still ``upside risks,'' the central bank said yesterday.
``We forget somehow that the economy has been growing very quickly recently,'' said Ruth Lea, an economic adviser to Arbuthnot Banking Group in London and a former Treasury official. ``The truth is that inflation pressures are picking up. Under those circumstances it's going to be more difficult for the bank to hit its 2 percent target.''
