Bermuda's two main banks have now fallen in line with overseas financial institutions by cutting interest rates. Global turbulence has brought cuts in the US, UK, Japan, Spain and Canada. David Fox reports.

The Bank of Butterfield is to cut its borrowing rates -- the latest in a string of international reductions triggered by global turmoil.

The bank will lower its Bermuda Dollar base rate by one quarter of one percent to six percent on Monday, in line with last week's announcement by the Bank of Bermuda.

But the bank said yesterday that this would not affect the interest rates paid on both its Strata savings accounts (3.00 percent to 4.25 percent, depending on the balance) and passbook savings (2.00 percent).

Also yesterday the Bank of England cut interest rates by a quarter of point to 7.25 point. It followed a quarter point easing in US interest rates recently.

The Bank of Butterfield's Executive vice president and chief financial officer Richard Ferrett said yesterday, "We are pleased to pass on the benefits of lower worldwide interest rates to our customers who borrow from us at rates linked to the bank's Bermuda Dollar base rate.

"They represent a majority of our customers to whom we provide borrowing facilities.'' With regard to the savings accounts Mr. Ferrett added, "We recognise the importance of these savings accounts to a large section of our customer base and will look to maintain the current interest rate levels paid on these accounts for as long as possible.

"There has been significant turbulence in the world's major financial markets over the past weeks, which has made it appropriate to evaluate carefully the implications for Bermuda Dollar interest rates.

"The bank felt now was the appropriate time to cut its Bermuda Dollar Base Rate.'' The Bank of England's interest rates cut followed hints earlier this week from British Prime Minister Tony Blair's government that it would welcome cheaper money.

The central bank's Monetary Policy Committee said it had reduced borrowing costs for the first time since June 1996 because the international environment had deteriorated, hitting business and consumer confidence in Britain.

Blair, on a tour of China, quickly welcomed the Bank's decision. "If we have really turned the corner at 7.5 percent interest rates then that would be a tremendous achievement,'' he commented.

Financial market analysts said the Bank had acted under political pressure, a charge Chancellor of the Exchequer (Finance Minister) Gordon Brown denied.

"I made the Bank of England independent. I have no intention of diminishing that independence,'' Brown told Britain's Channel Four television. Blair's government gave the Bank the freedom to set rates shortly after taking office last year.

The British cut followed recent reductions in Japan, the United States, Canada and Spain.

Markets had expected London's move because of the global financial crisis and British shares fell after the Bank's announcement on disappointment that the cut was not bigger. The FTSE index of leading stocks slid 2.7 percent to a fresh closing low this year of 4,698.9 points.

Further rate cuts are likely soon around Europe as countries ditching their currencies for the euro in January move toward common interest rate levels based on Germany's present low levels.

Economists say Italy is likely to cut rates once its 1999 budget is safely in the bag. Ireland and Portugal are likely to follow, analysts believe.

Britain's top business lobby, the Confederation of British Industry, was quick to applaud the Bank of England's rate cut.

"This should give a much needed boost to the confidence of UK firms and consumers despite the global uncertainties,'' said Kate Barker, chief economist at the CBI.

But union leaders said thousands of jobs were still at risk unless rates were cut again soon. "This is deeply disappointing news. The Bank of England should be ashamed of itself,'' said John Edmonds, head of the GMB union and president of the Trades Union Congress.

The central bank has had pressure heaped on it from all quarters to loosen monetary policy in recent weeks.

Industry leaders issued dire warnings about recession and union members picketed the Bank's London headquarters on Wednesday in addition to the government's hints.

Reflecting the government's sensitivity to charges it is undermining the Bank's new independence, Brown's press secretary Charlie Whelan wrote to the Financial Times newspaper on Thursday to deny the chancellor was trying to bounce the Bank into action.

Comments from Brown earlier this week that the United States and Canada had already cut rates and that the Bank of England had acknowledged that inflation was less of a worry, were read by the markets as a nudge.

On the domestic front, the move will also help to shore up Britain's flagging housing market. Home loan lenders including Halifax Plc (HFX.L), Abbey National Plc (ANL.L) and the Nationwide Building Society NAT.CN all rushed to cut their mortgage rates in immediate response.