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BoE cuts rate in surprise move
LONDON, England (CNN) -- The Bank of England cut interest rates in a surprise move on Thursday amid signals the manufacturing sector is in trouble. The BoE lowered its borrowing cost by 0.25 percentage points to 3.75 percent. The cut was the first in 15 months and takes rates to their lowest level in almost half a century. But the European Central Bank left interest rates unchanged on Thursday even as the fear of war saps consumer and business confidence. (More) All but one or two market watchers polled by Reuters had predicted the BoE would keep rates on hold. "The Bank of England is worried about growth. It's not concerned about inflation, it's worried about the global slowdown and the domestic slowdown, particularly in manufacturing, which is in recession." David Brown, economist at Bear Stearns, told Reuters. A recent report from the Chartered Institute of Purchasing and Supply showed manufacturing contracted in January, which could push the sector into its third recession in five years. At the same time, the benchmark FTSE 100 index of leading stocks has dived 10 percent so far this year as the continued threat of war saps business confidence. With mounting job losses the clamour for lower interest rates has been growing. "Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated. In order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to reduce interest rates by 0.25 percent," the central bank said in statement. Stephen Radley, chief economist at the Engineering Employers' Federation, welcomed the decision. "The warning signs are there for all to see. In the midst of such uncertainty manufacturers will breathe a sigh of relief that the MPC stands ready to do all it can to shelter the economy from the gathering storm clouds,'' he said. Uneasy over rate cutHowever, Ross Walker, UK economist at Royal Bank of Scotland, said he was "slightly uneasy" about the cut. "I can see nothing in the data that suggests the UK consumer needs further interest rate easing," he told the Press Association. He said the impact of the cut could be "asymmetric", boosting consumer demand and the housing market while it was "not obvious how it's going to help the manufacturing sector." Manufacturers are cutting jobs at a rate of about 10,000 a month, according to Reuters. Britain's top health and beauty retailer Boots said this week it planned to close one of its factories, a move that could cost up to 1,000 jobs. Holiday form MyTravel also said on Tuesday it may slash 700 jobs. Pressures easeFaced with many of the same problems, the 12-nation euro zone central bank [ECB] kept rates steady at 2.75 percent but many expect a rate cut before March or April at least. "All the Eurozone fundamentals point to a speedy ECB rate cut – especially with the economic downturn deepening, inflation risks receding, fiscal policy set to tighten and the stronger euro posing a more restrictive clamp on the recovery's long run potential," economist at Bear Stearns wrote in a note to investors before the rate decision on Thursday. Bear Stearns expects a rate cut of as much as 0.5 percent by the next ECB meeting on March 6. Concerns about possible war in Iraq, and more importantly the knock on effect, are dampening business investment and consumer confidence, boosting oil prices and the euro. German industry orders fell by a bigger-than-expected 4.1 percent month-on-month in December, data from the Economy and Labour Ministry showed on Thursday. Order books have been hurt by weak domestic economy and global economic uncertainty. Unemployment in Germany, the biggest euro zone economy, rose to a five-year high on Wednesday. (Full story) As inflationary pressures ease the ECB has room to trim rates, euro zone inflation fell to 2.1 percent in January from 2.3 percent in December and is likely to fall to 2 percent this year. But the euro has risen more than 9 percent against the dollar over the last two months and hit a three-year high of more than $1.09 last week -- the euro's rise is enough to neutralize the ECB's half percentage point rate cut in December, some analysts said.
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