0% interest rates 'possible in 2009'

Sunday, 04 January 2009 12:00

Negative inflation amid a recessionary economy could force the Bank of England to lower interest rates to zero, it has been claimed.

The Bank of England's monetary policy committee (MPC) will announce on Thursday the extent of the expected cut in interest rates from their current rate of two per cent.

Businesses are calling for the base rate to be halved but Howard Archer of research firm IHS Global Insight believes a 75 basis points cut to 1.25 per cent is more likely.

He cited "ongoing evidence that the recession is deepening, credit conditions remain[ing] punitively tight and inflationary pressures. retreating sharply" as reasons for this belief.

And he added: "While an even bigger cut could well occur, we suspect that the MPC may well prefer to moderate the pace at which it is cutting interest rates as they near zero and to allow the previous large cuts more time to feed through and take effect."

Despite these pressures the struggling British economy is likely to require further monetary assistance in 2009, it is feared.

IHS Global Insight forecasts consumer price inflation to average 0.6 per cent over 2009 and predicts it will turn negative in the second half of the year because of the contracting economy, moderating pay and sharply lower oil and commodity prices.

As a result Mr Archer fears the MPC may be forced to lower the base rate to zero per cent at some stage.

"Further out, we expect interest rates to fall to a low of 0.50 per cent in the second quarter of 2009 and then stay there for the rest of the year," he added.

"However, it is far from inconceivable that interest rates could come all the way down to zero."

A cut below two per cent would be a record low for the Bank of England, which has never before set interest rates below the current level in its 300-year history.

Some commercial banks and building societies are having to consider introducing negative interest rates on savings accounts.

This would effectively mean savers would pay a charge for asking banks to look after their deposits.

Lloyds TSB's chief economist Patrick Foley told the BBC such a move was "not impossible but as close to that as you can get", however.

"Most banks and building societies will keep rates positive. Many savers are more concerned about the safety of their money than the interest earned.

"Zero percent is a possibility for a brief period if people feel their savings are safe and it is temporary. So you could see that briefly but I can't imagine them going negative."

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