The decision by the Bank of England Monetary Policy Committee to cut a quarter point from its base interest rate came as quite a shock. This article takes a look at the statement from the bank that accompanied the decision and reviews the views and reactions from around the country.

The banks statement read as follows:

"The Bank of England's Monetary Policy Committee today voted to reduce the Bank's repo rate by 0.25% to 5.0%.

The Committee reviewed monetary and economic developments in the context of the projections to be published in the August Inflation Report. Indicators of world economic activity have been weaker than expected over the past few months. This and the persistent strength of sterling are adding to the pressures on the externally exposed sectors of the UK economy, and at the same time there are signs of weakening investment growth.

By contrast, retail spending, household borrowing and the housing market are still robust, partly supported by recent reductions in interest rates. On balance, the outlook, although highly uncertain, is for aggregate demand and output growth to be weaker than previously projected.

Although RPIX inflation has picked up in recent months, that partly reflects erratic factors, and underlying price and cost pressures are expected to remain subdued. Monetary policy needs to balance the weaker external environment by sustaining domestic demand growth.

The Committee decided to reduce interest rates by 0.25% in order to keep inflation on track to meet the 2½% inflation target in the medium term. The Committee's latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 8 August."

This is the first factor to get a mention in the bank's statement and is one that may be a little difficult for the average homeowner to get to grips with, as it has no immediate visible effect on life for most people.

However, the medium and longer term effects of a dampening of the world economy can include job losses, a lack of inward investment and a good chance of a UK recession.

John Butler, economist at HSBC holds a view that is echoed by a number of leading figures, including CBI Deputy Director-General John Cridland and The Engineering Employers' Federation's chief economist Stephen Radley. Mr. Butler said that the MPC "are concerned about the global outlook and are worried about seeing this feed through into domestic demand. They are taking the right pre-emptive measures so the UK has some growth this year."

One of the problems is that interest rates in this country are still relatively high compared to the US and the rest of Europe. This is one of the factors helping keep Stirling at a high level in relation to other currencies. Whilst this may be good for British holidaymakers abroad, a strong currency makes it more difficult for manufacturers to export their goods abroad and makes investment in the UK by major foreign companies less likely, as they can operate more chiefly elsewhere.

Not surprising then, that union leaders and exporters have constantly been calling for the rate cut, in order to ward off the economic downturn, and safeguard jobs and investment, which they feel are more important than fears that inflation could rise.

Roger Lyons, general secretary of the Manufacturing Science and Finance union, said: "We congratulate the MPC on finally listening to the plight of manufacturing industry. This cut is welcome news that will alleviate the pressure and save thousands of jobs."

However, some people think that the measure is not enough and argued that it is too little to save many of the long-suffering manufacturers. Ruth Lea, head of policy at the Institute of Directors said: "it remains questionable as to just how much help it will provide for a manufacturing sector beset by weakening international markets and the strong pound/weak euro."

GMB general secretary John Edmonds said the cut gave manufacturers a "breathing space", adding: "The MPC must follow this up to provide genuine help for UK industry, otherwise this but will prove to be too little too late."

Brendan Barber, deputy general secretary of the TUC, added: "The government should now support this move by increasing assistance for regional industrial development. They are in a position to smooth out the regional inequalities Britain is suffering but they will need to commit extra resources if they are to make a significant impact."

A prolonged shaky period on the stock market, job losses in the manufacturing sector and the threat of global slowdown making both problems worse has clearly dented business confidence, which then filters through to investment and further dampens growth.

RICS chief economist Milan Khatri said: "Some retrenchment in business investment spending is already evident, and firms have also become more cautious on acquiring new commercial business property."

Further evidence for this vicious circle comes from the BDO Stoy Hayward Optimism Index. The Index shows that business confidence amongst manufacturers - who have borne the brunt of the slowdown to date - has actually stabilised, boosted by those producing consumer goods and trading in the home market. But business confidence in the service sector, which has hitherto been performing well, has now fallen back. This is something that the MPC will be keen to but an end to, since the service sector now dominates the UK economy and any major downturn in that sector could be disastrous.

However, there was much to signal that the MPC would not lower rates - certainly enough to force us to get our prediction wrong for the first time this year. Recent reductions in interest rates have meant robust spells for retail spending, household borrowing and particularly the housing market.

Within hours of the cut, many mortgage lenders had immediately cut their rates, including Halifax, HSBC, Nationwide, Direct Line and Virgin One, with the Council of Mortgage Lenders said mortgages rates had now hit their lowest levels for more than 40 years. Meanwhile Abbey National, Barclays, Royal Bank of Scotland and Cheltenham & Gloucester all said they are currently reviewing their rates.

For many people the lower interest rates will filter through to mortgage repayments almost immediately. For borrowers on a tracker mortgage paying 1% over the base rate, the cut will knock around £15 from the monthly repayments on a £100,000 mortgage. The sum total of the four rate cuts this year would equate to around £65 from monthly repayments, reducing outgoings from £715 to £651. This increases the affordability of current house prices and can only add to the upwards pressure on property values, which are increasingly independent of the economy at large.

Given the obvious nervousness within the MPC with regards to stifling potential inflationary worries, it is rather surprising that the decision was made to cut rates on the back of recent data on spending and borrowing. Although Peter Williams, deputy director general of CML, claimed that the effect of the cut is "likely to be broadly neutral in its impact on the housing market", many economists believe that the latest cut could risk stoking inflationary pressures, fueling the high street spending boom and actually encouraging a further divide in the two speed economy that has developed.

Neil Parker, senor economist at the Royal Bank of Scotland, said: "There is a worry here that the Bank of England is setting monetary policy to try to balance the economy but in fact what they are doing is perhaps unbalancing it even more. Because we are going to see consumers and the housing market continue to grow very robustly and therefore manufacturers, while they will welcome the cut, might not get too much benefit from it particularly with sterling as strong as it is."

We will no doubt learn the full motivation for the decision when the MPC releases the minutes of the meeting on Wednesday 15th August, whilst the effects of their decision may not be felt for a much longer period.

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