Warning on 0% interest rates
November 5, 2008
A leading economist has recently stated that the base rate in the UK may have to fall to 0% in order to try and get the financial markets and the economy back on a stable footing. The warning comes as the economy races towards recession. Charles Goodhart, a founding member of the Bank of England’s Monetary Policy Committee, said that the base rate was set to fall aggressively. He served as a member of the MPC between 1997 and 2000, and is now professor emeritus of banking and finance at the London School of Economics.
He said: ‘Interest rates will go down from now, by how far and how fast nobody knows. They could go to zero. They went to zero in Japan in the 1990s when the Japanese had a recession or depression which went on for a long time and was quite severe.’
The base rate currently stands at 4.5% following a surprise rate cut of 0.5% at the start of October, but if the base rate does plunge to 0% this would be its lowest level since the Bank of England was founded over three hundred years ago.
The Prime Minister, Gordon Brown, has been calling for more aggressive cuts in interest rates, and he recently stated: ‘Inflation is coming down over the next few months and that will mean that it gives scope to the monetary authorities, including the Bank of England, round the world, to make a decision about interest rates.’
However, some officials have said that even aggressive rate cuts now are too little too late, as many see the nation as already being in a recession.
The government also wants to bring forward spending on major state-funded housing, defence and energy projects to boost the economy, but some officials are concerned about this. One industry professional said: ‘We would like to dissent from the attempt to use a public works programme to spend the country’s way out of recession. Public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector’s recovery once recession is past.’
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