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By Lee Wild

Date: Thursday 10 Apr 2008

LONDON (ShareCast) - Bank of England policymakers reacted to calls for lower interest rates today with a widely predicted quarter point cut, as the prospect of economic gloom overshadowed inflation concerns.

The base rate drops to 5%, its lowest since January 2007, which is where Deputy Governor John Gieve and arch-dove David Blanchflower both wanted it to be at the central bank’s meeting last month.

Monetary Policy Committee members will hope the move softens the blow of the credit crunch and boosts consumer sentiment, battered by tight credit markets and falling house prices.

The decision to cut rates for the third time in five months comes as forecasters turn increasingly downbeat on Britain's economic growth prospects for the next few years.

The CBI has cut its expectations for growth this year by 0.2% to 1.8% and to 1.7% for 2009, with higher food and fuel prices also likely to send inflation higher.

The employers' lobby group said that at the same time as the economy slows, inflation is due to peak at 3.2% in the third quarter of 2008, up from previous predictions of 2.7%.

It expects rates to fall as low as 4.5% in 2009.

The International Monetary Fund has also had its red pen out, cutting its expectations for UK growth to 1.6% for both this year and next.

Meanwhile, sterling continues to trade at record lows versus the euro as traders price in lower UK borrowing costs. European decision makers are seen keeping rates on hold at 4% again Thursday.

The pound fell to its worst against the 15-nation currency on the back of yesterday’s poor consumer confidence figures from the Nationwide and Tuesday’s news from the Halifax that house prices fell the most since September 1992 last month.