Interest Rate Cut Follows £50b 'Rescue Plan'

The Bank of England has sensationally slashed interest rates to 4.5%, on the same day Gordon Brown unveiled a radical £50b 'rescue plan' for UK banks.

The interest rate move came earlier than expected, with a 0.5% cut being implemented by the central bank, as well as six others.

The unprecedented step follows continued falls in the global money markets.

Earlier today, the Prime Minister announced eight of the country's biggest banks and building societies would receive a massive public capital injection.

Taxpayers will in turn gain a stake in the organisations, in the form of preference shares.

The equity scheme is aimed at shoring-up the domestic banking system, amid widespread market turmoil in the City, Europe and the US - following a plunge in economic confidence.

Mr Brown said the decision to release cash is "designed to put the British banking system on a sounder footing".

Despite this, the Stock Market still appears to be in a spin.

The FTSE 100 in London fell 5%, and while HBOS share grew by 26%, Barclays sustained an 11% drop and Standard Chartered dipped 13%.

The main points announced today:

• Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
• An additional £25bn in extra capital will be available in exchange for preference shares.
• £200bn will be available in short-term loans from the Bank of England, up from £100bn.
• Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
• To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

The eight banks that have signed up to the plan are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

Other banks will be offered inclusion into the plan, should they wish to apply.

By releasing the loans the government hopes to ease the increased tightening of lending between financial groups.

Chancellor Alistair Darling said: "This is beginning a process of un-bunging a big problem where banks won't lend to each other for long periods."

Terry Smith, Chief Executive of Tullett Prebon, said the government's action "should stop the panic in terms of people wondering whether or not the banks are safe".

Banks have broadly welcomed the plan.

"The government's announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system," HBOS said in a statement.

Barclays, Lloyds TSB and RBS extended similar sentiments.

HSBC also welcomed the plan but said it did not intend to use the recapitalisation scheme.

Preference shares are difference to ordinary dividends. These shares pay a fixed rate of interest and do not entitle the holder to voting rights.

There is a chance taxpayers could make a profit on the shares, although this is not guaranteed.

(PR/JM)