BoE cuts UK rates but warns on inflation

The Bank of England cut interest rates on Thursday in an attempt to shore up the British economy during the global credit squeeze, but policymakers are clearly concerned that inflation remains a problem.

The central bank lowered its key rate by a quarter percentage point to 5.25 percent, following a similar cut in December. All 60 economists polled by Reuters had forecast the move.

But interest rate futures fell as many people in the market had expected a more dovish statement from the bank’s Monetary Policy Committee which could have paved the way for more cuts.

“The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target,” the BoE said.

Policymakers have long held that they would welcome a gentle economic slowdown, but data pointing to a sharp housing market slowdown and crumbling consumer confidence have raised the risk of a hard landing.

However, inflation expectations are running at record levels and BoE Governor Mervyn King has warned that inflation could rise well above the government’s two percent target soon, taming predictions that drastic easing lies ahead.

“Ultimately what they’re saying is that some degree of slowdown in the economy is desirable to get inflation down over the medium term, so don’t expect us to cut like bandits like the Federal Reserve,” said Alan Clarke, an economist at BNP Paribas.

The U.S. Fed has slashed interest rates by 125 basis points already this year in an effort to stave off a possible recession in the world’s biggest economy.