Will interest rates drop to 0%?
March 18, 2009
Since October of last year the UK has seen the base interest rate plummet, and it has fallen from 5 percent in October to just 1 percent following the February Monetary Policy Committee meeting, following a series of base rate cuts over a number of months.
The base rate is now at its lowest level in the history of the Bank of England, which spans three hundred and fifteen years, and some industry officials are expecting it to fall to fresh lows over the coming months.
Whilst some economists have said that the central bank can take the time to pause for breath following the series of aggressive rate cuts, many others are of the mind that the Bank of England will not stop at 1 percent, and will cut the base rate even further over the next couple of months to a new historic low of just 0.5 percent. Some analysts have predicted that the next MPC meeting will result in the base rate falling by 0.25 percent to 0.75 percent, and then there will be a further fall in April, when the base rate will drop to just 0.5 percent, a further fall of 0.25 percent.
In fact, speculation has now arisen as to whether the base interest rate could even fall as low as 0 percent in the coming months, and this is something that has certainly not been ruled out and has even been seen as a likely outcome by some analysts over recent months. The Bank of England has been looking into the printing of more money to ease the financial crisis, and has recently stated: ‘The global economy is in the throes of a severe and synchronised downturn. The weakness of the global banking and financial system means that the supply of credit remains constrained.’
The central bank also added: ‘The underlying picture for consumer spending appears weak. Businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding labour.’
However, this has not stopped speculation with regards to a drop to 0 percent in the interest rate. A number of industry experts have expressed their views on the likelihood of the base rate falling to 0 percent. One official from Charles Stanley stated: ‘More out of exasperation than conviction, the MPC has cut base rates by 50 basis points to 1%. It must be asked, why, if a total of 375 basis points of rate cuts have not arrested the decline in demand, a further 50 basis points should suddenly kick start the UK economy?’
An expert from the Ernst and Young Item Club said: ‘The economy is in a deep recession and further interest rate cuts may be on the cards. Interest rates have further to fall although we recommend the immediate implementation of quantitative easing, where the money base would be expanded in the hope that surplus funds would be spent or invested.’
An official from Grant Thornton said: ‘The Bank’s main priority has to be to avoid deflation otherwise the UK will be remembered in economic history as the country worst hit by the global credit crunch. The only guarantee is that the recession will last longer than the Government is willing to admit.’
An official from RBS added: ‘Today’s cut sends a clear message - putting a floor under the fragile economy remains priority number one, the UK’s eight million savers will have to play second fiddle for now. The Bank is quickly running out of wriggle room on rates. Other weapons in the Bank’s arsenal are now being readied for the offensive - buying assets first, printing money second.’
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