Interest rates down to 4%

The cost of borrowing fell to its lowest level in 37 years today as the Bank of England cut rates by 0.5% to 4%, in its continuing campaign to stave off recession.

The surprisingly aggressive move by the Bank's monetary policy committee marked the seventh rate reduction this year. Rates are now at their lowest since January 1964.

The Bank was under pressure from unions and industrialists to slash rates by a half-point. The Confederation of British Industry's director general, Digby Jones, said there would never be a stronger case for a half-point move, while the TUC general secretary, John Monks, said the rate cut should be followed by a "pre-budget for jobs" from the chancellor later this month.

Official figures released on Monday showed that British manufacturing output fell at the fastest rate for nine years in September, while a sharp contraction in services renewed fears that the effects of the September 11 attacks in the US are spreading throughout the world economy.

But consumer spending in the UK remains buoyant and the economy is expected to get a boost as the demand-side effects of the chancellor's public spending programmes kick in. While economic growth is expected to slow sharply from its 2.2% - 2.5% rate this year, the British economy is forecast to be in the vanguard of the G7 industrialised countries in 2002.

On Tuesday, the US Federal Reserve Board slashed rates by a half-point, bringing rates down to a mere 2%. The Fed's move came amid growing signs of economic distress in the US; a sharp rise in unemployment, economic contraction for the first time in a decade, and plummeting consumer confidence.

While analysts have welcomed the aggressive easing of monetary policy from Fed chairman Alan Greenspan, there is now concern that that he is running out of options. Unless the American economy shows signs of revival, lower interest rates will sooner or later put downward pressure on the dollar as investors begin to dump the greenback.