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The Telegraph Interest rate cut: Experts react Experts react to the Bank of England's decision to cut interest rates to 3 per cent By Myra Butterworth, Personal Finance Correspondent Last Updated: 9:46PM GMT 06 Nov 2008 Shadow Chancellor, George Osborne said: "This is a shot in the arm for the economy, but it shows how sick the patient is. "As we have argued, reducing interest rates is the best way to fight the recession and so we welcome the Bank of England's decision. But the size of the cut means that the Bank recognises the UK economy is in serious trouble. "Now we need the cut to be passed on to homeowners and small businesses. I would hope that banks that see themselves in strong and stable positions can pass on the cut in full. "The recapitalisation plan was not just to rescue the banks but to rescue the economy and the millions of families who depend on it." James Knightley, an ING economist, expects more aggressive rate cuts, with the Bank's base rate down to 2.5 per cent in December and 2 per cent in January. Howard Archer, an economist at Global Insight, said it was possible interest rates could come down to 1.5 per cent by mid-2009. He said: "This reflects our belief that the economy will contract up to, and including, the third quarter of 2009 before stabilising. We expect GDP to contract by 1.5 per cent overall in 2009." Mr Archer said today's larger than expected cut to 3 per cent was justified given the UK economy was now in "grave danger of suffering a prolonged, deep recession". "Furthermore, mounting evidence that underlying inflationary pressures are now moderating significantly gave the Bank scope for aggressive action," he added. Peter Damesick, head of UK research at CBRE, said: "The size of the reduction reflects three things. First, the MPC had been seriously behind the curve in responding to the gathering pace of the UK economic downturn. Second, the Committee is now very concerned about the likely depth of the downturn. And third, with the credit markets still frozen, it shows that the Committee felt a big cut was needed to achieve the required monetary easing." Simon Ward, economist at fund managers New Star, said: "Drastic action was warranted but there is a risk of exhausting interest rate ammunition too soon. The cut will have limited impact unless the financial system starts to function normally. The MPC is hoping to shock money and credit markets back to life but the Fed's rate-slashing failed to avert a US credit crunch. UK policy-makers may need to consider additional steps to ensure the flow of credit to firms and households, such as an expansion of the small firms loan guarantee scheme." Paul Niven, head of asset allocation at F&C Asset Management, said: "Where rates finally settle before the low in this cycle remains to be seen but further material cuts will be forthcoming in the UK, with expectations for 2 per cent or lower now becoming entrenched in market expectations." Louise Cuming head of mortgages at moneysupermarket.com, said: "Today's move couldn't have come at a better time for many homeowners, and is a far greater step in the right direction than many of us had expected. "But a cut in the base rate, even a pretty gargantuan one as we've seen today, won't necessarily encourage lenders to start lending again, and they may well take a much more conservative approach while building up funds. Until lenders begin to lend and not hoard their cash in their coffers, the problem remains the same. Lending criteria won't change just because the Bank of England has finally woken up to the prospect of the R word." Darren Cook, mortgage expert at Moneyfacts.co.uk, said: "Congratulations must go out to Lloyd TSB and Cheltenham & Gloucester for making a bold statement earlier today, pledging that they will cut their standard variable rate (SVR) in full in line with the Bank of England rate cut. Hats off to them for not reneging on this pledge after the announcement of the unpredicted 1.50% base rate cut. They will drop their rate to 5.00% with effect from 1 December." Stewart Baseley, executive chairman of the House Builders Federation, said: "This is a welcome and bold move by the Bank, and recognition of the unique economic situation. "As the Government indicated last month when announcing its proposals to inject liquidity in to the banking system, it is now imperative that the Government insists that the banks pass the rate cut on to homeowners. "Hopefully then, the combined steps taken by the Bank and Government will result in a return of some sensible levels of mortgage lending and increased consumer confidence." Ray Boulger of mortgage brokers John Charcol, said: "Today's stunning 1.5 percentage point cut in Bank Rate to 3 per cent is way beyond even the most optimistic expectations and the accompanying, much longer than usual, statement from the Bank of England comments that "there has been a very marked deterioration in the outlook for economic activity at home and abroad." It added "the Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target." These comments indicate that further cuts are still likely to be needed in the near future, especially if much of this cut is not passed on to borrowers." Rupert Dickinson, chief executive of Grainger, the UK's largest listed residential landlord, said: "I am delighted that the Monetary Policy Committee has taken decisive action and cut interest rates by 1.5%. Key economies are recognising that this recession could be deeper and longer than expected and are finally acting accordingly. "Such a significant cut will help restore liquidity and shore up the credit market. Banks should be encouraged to pass most of this cut onto consumers, improving housing affordability and allowing first time buyers to re-enter the market. "Previous MPC decisions have exasperated house price inflation by keeping rates too low in the past. Mortgage availability did not improve significantly after the last 0.5% reduction, so the housing market remained stagnant and needed this injection."