Bank interest rates look set to hit new record

02 February 2009 / by Rebecca Sargent
The Bank of England's Monetary Policy Committee (MPC) is expected to cut interest rates once again this week, to a new record low.

The Bank base rate is currently at 1.5 per cent, but experts believe that this will fall to one per cent on Thursday – the lowest rate since the Bank of England was founded in 1694.

According to Global Insight's chief economist Howard Archer, the rate cut will be a result of several factors, including the fact that the UK is now officially in a recession following a further contraction in GDP in December.

Other factors that Mr Archer points to include inflation and GDP forecasts which will be made available to the MPC, and are likely to point to inflation falling below its target rate of two per cent unless interest rates are cut further.

Commenting, Mr Archer said recent data and survey results are, "largely reinforcing belief that the economy is poised to see its largest single-year contraction since the Second World War in 2009, credit conditions remaining extremely tight, and a period of deflation highly possible in the second half of this year.

"The pressure on the Bank of England to act is intense. We expect the Bank of England to respond by cutting interest rates by a further 50 basis points from 1.5 per cent to just one per cent on Thursday."

However, Mr Archer continued to say: "Admittedly, with interest rates already down to 1.5 per cent further reductions are likely to have only a limited impact on the economy."

"This is even more the case as the dislocation of financial markets has meant that the transmission mechanism from official interest rates to the economy being impaired, while savers are being hit hard by the sharp reduction in interest rates."

Because interest rates seem to be having little effect on the root of the problem and banks continue to restrict lending, further measures are being put in place to help steer the UK through the recession – the Bank of England is expected to begin using a new £50billion fund to buy up private sector assets and reduce pressure on companies soon.

But Mr Archer thinks more action may also be necessary, he said: "It is far from inconceivable that interest rates could come all the way down to zero. It also seems highly possible that the Bank of England will eventually engage in quantitative easing.

"This would be in addition to the purchase of high-quality assets that the Bank of England is shortly to begin, which is being financed by the issuing of Treasury bills worth £50billion."

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