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 THE Bank of England said today it is prepared to slash interest rates to zero
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Mervyn King: pledged to do 'whatever it takes' to revive economy
Jonathan Prynn, Consumer Affairs Editor
12.11.08
THE Bank of England said today it is prepared to slash interest rates to zero to save the economy
Governor Mervyn King said the official cost of borrowing would be cut to “whatever level is necessary” to boost confidence and stave off a long and deep recession
Interest rates in Britain have never fallen below two per cent since the foundation of the Bank of England in 1694
The prospect of “free money” was raised on yet another bleak day of economic news:
● The Governor said in his November inflation report that Britain is already in recession and warned that the economy will be shrinking by two per cent a year by early next year
● He said “confidence has been shaken badly” by the worst financial and banking crisis in almost a century.
● Inflation is now expected to drop to one per cent next year and prices could even start to fall because of the lack of economic activity
● Unemployment jumped to an 11-year high of 1.8 million. The total is forecast to hit two million by Christmas and could reach three million by 2010
● The pound fell to a new record low against the euro of 82.1p and also lost value against the dollar
Jonathan Loynes, chief European economist at Capital Economics, said: “Another cut in interest rates of at least 0.5 per cent next month now looks very likely, with further moves in the following months, perhaps bringing interest rates down to one per cent by the middle of next year
“But like Mr King, we would not rule out the possibility that interest rates have to fall all the way to zero.”
Mr King said interest rates would be set at the level needed to boost activity and keep inflation close to its two per cent target rate.
Prices are rising at more than five per cent but the Bank is worried that the dramatic downturn in the economy could usher in a period of deflation with falling prices, increasing the risk of prolonged Thirties-style depression
The commitment came the week after the Bank's base rate was cut by 1.5 per cent to three per cent, its lowest level for more than half a century
Further cuts are expected and Mr King even refused to rule out the possibility of interest rates falling to zero
They have never been below two per cent since the formation of the Bank of England in 1694.
That could mean some homeowners on existing tracker mortgages in the unprecedented position of enjoying a negative interest rate on their loan. It could be bad news for savers
Japan had zero rates from 2001 to 2006 after its economy stagnated in the early Nineties but its economic authorities were accused of being too slow to react
The Bank has been criticised by some commentators for not cutting rates quickly enough as the credit crunch took hold and will be desperate to avoid being seen as “asleep on the job”
Mr King, presenting the Bank's November Inflation Report, painted a gloomy picture of prospects for the economy after the worst financial crisis since 1914. He said Britain “probably entered recession in the second half of 2008” and will not start to recover until towards the end of 2010
The economy could be contracting at a rate of two per cent a year by early next year, raising the possibility of a downturn at least as bad as that in the early Nineties and possibly the worst since the early Eighties
The Governor said the collapse of Lehman Brothers and the global financial meltdown it triggered had “very few historical parallels”, adding: “Confidence has been shaken badly.”
However, he expects a swift recovery once the storm has blown itself out: “We are moving into very difficult times and people should be concerned we are moving into those difficult times, but that is not to say we won't come through it. We will come through it and we are taking the right actions to come through it.”
The collapsing oil price and sharp falls in the value of other raw materials and commodities means that inflation could fall to one per cent or lower next year
The gloomy tone of the report is in sharp contrast to the last report in August when the main concern was how to rein in prices that were being fuelled by record increases in the cost of oil
Alistair Darling is preparing a package of tax cuts for poorer households without children in his mini-budget
The measures would be billed as compensation for those who lost out from the abolition of the 10p rate of income tax
The Chancellor is also working on details of a wider package of tax cuts and spending measures designed to stimulate the economy. Reports have suggested it could amount to £15 billion, funded by higher borrowing
http://www.thisislondon.co.uk/standard/article-23585907...+per+cent/article.do
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Mohamed Omer
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