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Will the Bank of England bring interest rates to zero in 2009?
Background: LONDON (AFP) — The Bank of England on 8 January cut its key lending rate by half a percentage point to 1.5 percent, the lowest level in its 315-year history, to ward off any threat of deflation in a sharp economic downturn.
The decision left British borrowing costs at their lowest since formation of the Bank of England in 1694, reflecting the seriousness of a slowdown which has left the country on the brink of recession.
The move reflected concern that inflation could fall toward zero while some economists fear Britain may even experience deflation -- a prolonged period of falling prices -- which on top of a looming recession, could strangle the economy. "Accordingly, the committee concluded that a further reduction ... of 0.5 percentage points to 1.5 percent was necessary to meet the (inflation) target in the medium term."
The Bank of England on Thursday said that the world economy appeared "to be undergoing an unusually sharp and synchronised downturn. The central bank believes that Britain is already in recession although this will be confirmed officially only after growth data due later this month.
"Faced with increasingly dismal economic news the Bank has decided that record low interest rates are necessary to wrestle the economy from the throes of recession," Martin Slaney, head of derivatives at GFT, said Thursday following the BoE's latest policy decision. "The size of the cut was widely expected and reflects the sheer glut of bad news across the board, from the housing market to manufacturing, services and on the high street. "Despite the historical nature of the Bank's move, it is increasingly apparent that rate cuts alone may not be enough if they do not stimulate lending. We are now in uncharted economic territory," Slaney said.
According to a newspaper report on Thursday, the government was considering whether the BoE should expand money supply to boost lending and kick-start the economy. The Times newspaper, which cited a senior government source, said British finance minister Alistair Darling and BoE governor Mervyn King were looking at introducing a policy of "quantitative easing." Such an approach -- already adopted by the US Federal Reserve -- would allow the BoE to effectively print money to pump into the system and stimulate lending amid the ongoing worldwide financial crisis.
"We expect the Bank of England to cut interest rates again in February and to bring them down to a low of 0.25-0.50 percent in the second quarter," IHS Global Insight analyst Howard Archer said on Thursday.
"Indeed, it is very possible that they could come all the way down to zero.
The decision left British borrowing costs at their lowest since formation of the Bank of England in 1694, reflecting the seriousness of a slowdown which has left the country on the brink of recession.
The move reflected concern that inflation could fall toward zero while some economists fear Britain may even experience deflation -- a prolonged period of falling prices -- which on top of a looming recession, could strangle the economy. "Accordingly, the committee concluded that a further reduction ... of 0.5 percentage points to 1.5 percent was necessary to meet the (inflation) target in the medium term."
The Bank of England on Thursday said that the world economy appeared "to be undergoing an unusually sharp and synchronised downturn. The central bank believes that Britain is already in recession although this will be confirmed officially only after growth data due later this month.
"Faced with increasingly dismal economic news the Bank has decided that record low interest rates are necessary to wrestle the economy from the throes of recession," Martin Slaney, head of derivatives at GFT, said Thursday following the BoE's latest policy decision. "The size of the cut was widely expected and reflects the sheer glut of bad news across the board, from the housing market to manufacturing, services and on the high street. "Despite the historical nature of the Bank's move, it is increasingly apparent that rate cuts alone may not be enough if they do not stimulate lending. We are now in uncharted economic territory," Slaney said.
According to a newspaper report on Thursday, the government was considering whether the BoE should expand money supply to boost lending and kick-start the economy. The Times newspaper, which cited a senior government source, said British finance minister Alistair Darling and BoE governor Mervyn King were looking at introducing a policy of "quantitative easing." Such an approach -- already adopted by the US Federal Reserve -- would allow the BoE to effectively print money to pump into the system and stimulate lending amid the ongoing worldwide financial crisis.
"We expect the Bank of England to cut interest rates again in February and to bring them down to a low of 0.25-0.50 percent in the second quarter," IHS Global Insight analyst Howard Archer said on Thursday.
"Indeed, it is very possible that they could come all the way down to zero.
Settlement details:As reported by a major mainstream news source.
Forecast history %
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