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Interest rates may fall 0.5% amid quantitative easing speculation

04 March 2009 / by Rebecca Sargent
City analysts are predicting that the Bank of England will slash interest rates by a further 0.5 per cent, ahead of its Monetary Policy Committee (MPC) meeting tomorrow.

The move would push the UK interest rate to another lowest recorded level, and is expected coincide with further measures, including quantitative easing, referred to by many as akin to 'printing money.'

Analysts at Lloyds TSB said that projections for UK GDP growth and comments made by MPC members in recent weeks, "leave little doubt that UK base rate will be cut below one per cent on Thursday.

"Our forecast is for a 0.5 per cent move – but it will be accompanied by a possible announcement on quantitative easing.

"With the Bank of England running out of conventional monetary policy tools as base rates approach zero, a decision to make purchases of Government gilts to raise private sector spending may not be far away."

Howard Archer at Global Insight agrees that interest rates may fall tomorrow, but argues, "it is not a cast iron certainty given the MPC's concerns about the negative repercussions that very low interest rates might have on the banking sector.

And the Building Societies Association (BSA) also argues that a further interest rate cut would be bad news for savers, borrowers and institutions. Adrian Coles, director general of BSA said:

"If the Bank of England wishes to make a contribution to a recovery in the housing and mortgage markets, it should not cut interest rates this month.

"If the Bank feels further action is now necessary, quantitative easing would be much preferable to a further rate reduction, as it would increase the flow of funds in the economy, and make it easier for deposit-takers to attract funds."

It is because of the potential benefits of quantitative easing that analyst Howard Archer now expects 0.5 per cent to be the floor for UK interest rates, "quantitative easing is poised to come to the forefront in the Bank of England's ongoing efforts to stimulate the economy and this could very well start in March," he said.

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