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Base rate could plunge to record-breaking 1 per cent
Jonathan Prynn, Consumer Affairs Editor29.10.08
INTEREST rates are heading for just one per cent the lowest since 1694 by the end of next year, a leading City economist forecast today.
Jonathan Loynes, chief European economist at Capital Economics, said the recession would force the Bank of England to carry on cutting its base rate to unprecedented levels.
He added: "Extraordinary circumstances require extraordinary actions. With the current recession likely to be deeper than that in the early Nineties and the credit crunch impairing the effectiveness of monetary policy, we now expect UK interest rates to fall to an all-time low of just one per cent."
The US Federal Reserve is tonight expected to cut its rate from 1.5 per cent to one per cent or even 0.75 per cent. That would put pressure on the Bank of England to lower its base rate from 4.5 per cent to 3.5 per cent when its monetary policy committee meets next week.
Further cuts to below two per cent would take Britain into uncharted territory. The base rate was last at two per cent in November 1951, having been set at that level in October 1939 after the outbreak of the Second World War. It has not been lower than two per cent since the founding of the Bank of England in 1694.
Cuts on that scale would bring huge savings for home owners on tracker mortgages, although many have minimum rates below which they cannot fall. It would almost certainly mean better rates for new borrowers, but these are unlikely to go as low as one per cent. However, it would also pose problems for savers who depend on income.
Reader views (5)
Everyone is missing the point. The only reason the BoE rate is being forced down is so the Banks can make more money and repay the government loans back to make it look like it was all a good idea by Dick Dastardly and Muttley.
- Dereck, London, England
The banks should legitamately make some money above the Bank of England rate. But can can we expect the interest rate that they charge on loans, mortgages, overdrafts etc to fall to 1% above what the Bank of England is charging? Let's wait and see. But not for too long...
- Aaron, London, UK
Don't hold your breath. And even if it does happen, don't expect cheap loans and mortgages. The banks have got a lot of money to recoup from us...
- Nobby Clark, Perth, Scotland
Wow! thats the best news I've heard from Capital Economics! The same company predicted in Jan 2006 and said there will not be a houseprice crash!
Lets face it - Base rate needs to be at 1% to make a difference, and then watch, mortgage lenders margins on tracker rates will be BBR + 4-5%! and they will want a 60% deposit and details of what you had for breakfast befoer they lend. Its happening now, I know, I am a mortgage broker and IFA.
- Mortgage Broker N3, London, England
The bank rate is like limbo dancing. There is a point at which no one can go lower. 0% means that banks will 'store' your money relieving you of a lumpy mattress, whilst lending it to anyone who will offer a crumb. Devaluation or adding zeros to the notes is the way out. Only when I see that Public Service Pensions are being lowered to take in negative interest will the politicians wake up.
- Michael Murphy, brightlingsea england
