Bank of England announces surprise interest rate cut

The Bank of England today slashed interest rates to a 48-year-low in a move which will boost beleaguered manufacturers but could fuel a further rise in house prices.

The cut brings interest rates to 3.75%, the lowest since February 1955, and is the first time the Bank has moved rates in 14 months. It comes amid increasing fears about the economy.

Union leaders have stepped up calls as Britain's manufacturing industry continues to struggle amid weak global demand.

In addition, surveys have shown the service sector is also slowing, with growth at its weakest pace in nearly a year, while worries remain about retail spending - despite a recent jump in high street figures.

Economists are also concerned about below-trend economic growth and fears about the effects from a potential Iraqi war.

But balancing that are worries about the housing market, which remains strong with prices increasing by 1.5% in January.

Analysts fear that today's cut in rates could fuel the property market further, making the chances of a sharp drop more likely.

Above-target inflation, at 2.7%, and worries about the effect of higher oil prices have also been cited as reasons for keeping rates on hold.The dilemma has seen the Bank of England keep the cost of borrowing static since November 2001.

Economists warned today's move could have serious consequences.

John Butler, UK economist at HSBC, said: "This is one of the biggest gambles any central bank has done - cutting rates when house price inflation is close to 30% and inflation is already above the target.

"They are being a global player and taking their eye off the domestic economy. This could have terrible consequences for the UK."

However, Philip Shaw, economist at Investec, said: "The timing of the move comes as a surprise - particularly given high house price inflation and the most recent jump in retail sales.

"However surveys have indicated the economy as a whole has continued to slow and it is really the timing rather than the cut which is a surprise."