The Bank of England’s Monetary Policy Committee concluded the monthly two-day meeting by surprising the market with a gargantuan 1.5 percentage point cut in the Base Rate, reducing it to 3.00% and storming through the previous multi-generational low hit in 2003 as the rate hit its lowest point in 54 years.

Media and economists had been debating all week whether the 50 basis point cut which had been baked in would be topped with something as inconceivably as large as a full percentage point. In the end the chatter was meaningless as 150 basis points sliced off the rate in one go, the biggest single meeting cut since 1981.

At midday the Base Rate was suddenly a third less than it was at 11:59.

Rationally speaking you can see why such a large cut, however belated many may consider it being. The difference between LIBOR, the London InterBank Offered Rate, and the Base Rate has widened tremendously since the Credit Crunch commenced. From a pre-Crunch premium of just 16bp for on the 3-month LIBOR rate, the rate banks most commonly borrow at, to a recent peak around 180bp, it is this rate which is impacting what consumers end up paying when they borrow.

It is hoped that such a substantial cut in the Base Rate will drag interbank rates down, both on a nominal and relative basis. providing some relief for borrowers whilst still allowing banks to gradually rebuild their balance sheets.

With the economy already in recession, per capita GDP contracted by 0.15% in the second quarter of the year, and house prices dropping like the proverbial stone, something was needed to try to make people feel better. No doubt the hope is that such a sizable rate cut will encourage lenders to lend and borrowers to borrow, reinvigorating the consumer and putting a floor under the housing market, though higher LTV mortgages will be needed for the latter.

As for the by-election in Glenrothes, I doubt any potential impact at on the outcome was high on the list when the MPC made its decision.

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