The BoE’s decision to cut the bank rate by 1.5 percentage points to 3% was designed to address “a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit".
The bank said that it “judged that a significant reduction in the bank rate was necessary now in order to meet the 2% target for consumer price index (CPI) inflation in the medium term”.
Today's move by the BoE is the latest in a series of initiatives by central banks to prevent a financial meltdown. The US Federal Reserve cut its benchmark federal funds rate by 50 basis points last week, while the Bank of Australia dropped its key interest rate from 6% to 5.25% this week. The European Central Bank is expected to announce its latest monetary policy initiative later this week.
Central bank decisions to slash interest rates have gone a significant way to restoring confidence in interbank lending.
Overnight sterling Libor fell 0.5 percentage points from 4.5% yesterday to 4.0% today. Euro Libor decreased to 3.46% from 3.48% yesterday, while dollar borrowing costs rose from 0.31% to 0.33%
In the three-month markets, sterling Libor and dollar Libor both fell 0.12 percentage points from 5.68% to 5.56% and 2.51% to 2.39% respectively. Euro three month Libor dropped from 4.65% yesterday to 4.60% today
The Ted spread, which tracks the difference between three-month Libor and US Treasury bills, also fell today from 2.12% at the close of trading yesterday to 2.01% at 1300 GMT today.
See also: Ted spread and Libor drop again