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Bank rates head for zero per cent
Jonathan Prynn, Consumer Affairs Editor12 Nov 2008
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.
Reader views (36)
What if the 0% interest fall, do we need to have promotion from bank, like (No interest, No payment up to 2-3 years. Borrow now and no payment to the bank for next 2-3 years. )
{this market promotion use by Australia furniture shop} I think it is next to use after 0% plan, fail.
- Kim, Singapore, 14/11/2008 03:07
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Lower and then down to zero growth is good! Who ever thought the world could support continuous never-ending growth? What's happening is a natural ecological correction. Transition Towns has it right. We can live better and more simply --far better...
- Mary Grojean, usa, 14/11/2008 01:32
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Q: How do you end a crisis caused by people spending money they don't have on things they don't need?
A: Lower interest rates to encourage more people to spend more money they don't have on more things they don't need!
- Paul, England, 13/11/2008 12:43
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So let me get this straight, we are in the midst of a credit crunch which was caused by cheap and abundant credit being extended across the world economies for too long. And our solution is to make credit even cheaper to buy our way out of the problem. If rates go below 2% I think it is fair to say that this will be seen as proof by many that capitalism is failing in it's current form. After all this will be an unprecedented event since the formation of the standard bearer of the British economy over 300 years ago!
- Maru, London, 13/11/2008 12:41
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Too little, too late!
- Fraser, Telford Park, 13/11/2008 11:08
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I think this just shows how bad things are going to get. These guys are the experts and they are worried. The reason why we are in such a mess is because people have been living on borrowed money and beleived they would be able to do so indefinitely.
I was just a teenager during the last recession and remember the pain my parents went through to keep a roof over our heads and food on our table. I can't beleive some people are almost in denial about what is about to happen, they think things aren't going to be that bad. Wake up, it is.
- J Rahman, London, 13/11/2008 09:56
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Oh god you people. What is really being said in Mr Kins statement is that as Govenor of the Bank of England he is prepared to take whatever steps needed to beat of the economical crisis, for example the incredible step of 0% interest rates.
We have lived through a massive boom it is now time to be sensible tighten belts and stop being silly. Yes spend you money, but make sure it is your money and not what the bank will let you have.
Good for you Mr King
- Stuart, Luton, UK, 13/11/2008 09:17
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Japan has had a zero base rate for some time and 'utter hell' hasn't occurred.
The worrying issue is what they aren't telling us. We had recessions before but they haven't led to this level of fiscal panic from Govt in the past.
- Adam, Harrow, UK, 13/11/2008 08:44
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@ Mgrelton, London
I'm afraid they don't care. This new "type" of economy is inhumane and murderous.
- Guenter Monkowski, Holualoa, USA, 13/11/2008 04:27
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zero percent is a little ridiculous, but I do think 3% interest rate for residential and 3.5% buy to let, this way the banks will get there repayments albeit a little slower. Saving accounts should be treated seperately.
- Tony Remy, london, 13/11/2008 01:14
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I hope they don't do it, (slash interest rates to zero) once interest is zero. It will be hard for the bank to rise up interest in future. I hope England create more green projects to pump job up then lower interest rate or give away money.
- Kim, Singapore, 13/11/2008 00:49
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If you think the pound has taken a battering, look at the Australian dollar which, because of its dependence on commodities, has declined even more. An Aussie dollar was worth nearly 50p a few months ago, now it's worth 43p; against the US$ it's gone from near parity to 64c. The mystery to me is why everyone now sees the US$ as the currency to hold.
- Tonyb, Melbourne, Australia, 12/11/2008 22:15
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having zero rates does not mean necessary mean inflation
one can have zero rates and still noone willing to take the loans ( because fo fears to lose income and being unable to repay the debt even with zero interest) so there is not going to be inflation at all
- Lucas, Lithuania, 12/11/2008 22:09
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Labour certainly know how to do a Boom and Bust!!!!!
- Mark A, london england, 12/11/2008 21:12
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well if you don't like it, buy gold.
- Nu, london, 12/11/2008 20:34
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We have to severely cut government expenditure.
- Np, England, 12/11/2008 19:54
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The whole scenario is like a horror movie. King should have been put out to grass a long time ago along with his ridiculous MPC committee, but then it was our brilliant P.M. then Chancellor who presided over this catastrophe. Unfortunately it is too late, we are all going to suffer incredible hardship which will not be alleviated by Cameron and his merry men. One can only hope that America digs itself out eventually and that their resurgence assists our eventual recovery
- Sheila, london uk, 12/11/2008 19:48
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OK then Nobby,lets return to the interest rate's we had in Thatcher's day,or have you forgotten,or choose not to remember?
- Marcus Norton Warren, Epsom, 12/11/2008 19:44
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Irespective of what has been said it is clear that the United Kingdom needs a new political direction, which means that the UK urgently needs a general election or a coalition government. It seem that the Scotsman has failed!!!
- Arthur Lincoln, arthur.lincoln@skynet.be, 12/11/2008 18:35
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Every time man opens his month the pound takes a beating.
Why does he not see that he is talking the economy down ?
- Bernard Parke, GUILDFORD, 12/11/2008 18:23
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The Bible Teaches:
25 “If you lend money to any of my people who are in need, do not charge interest as a money lender would.
26 If you take your neighbor’s cloak as security for a loan, you must return it before sunset.
27 This coat may be the only blanket your neighbor has. How can a person sleep without it? If you do not return it and your neighbor cries out to me for help, then I will hear, for I am merciful. Exodus 22:25-27 (NLT)
I trust the bible. But this will only work if ordinary people can get interest free loans. Simply giving the "money lenders" who created the whole mess interest free money, so they can exploit the rest of us is going to worsen the problem. The bankers will still have expensive limos taking them to fancy restaurants for lunch, while they drive past you and me standing in the soup kitchen lineup.
- Norman Grant Smith, Chilliwack, Canada, 12/11/2008 18:15
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Japan has had zero interest rates and they are still very low. WE are not pathfinding here.
A new paradigm is required, because free market capitalism has basically shot its load and is incapable of unassisted recovery.
- Chris, Chesterfield, UK, 12/11/2008 17:59
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If anyone had a modicomb of sense they would cut the price of fuel immediately-This has been done in South Africa and is having an immediate effect on retail sales.
Are we going to get many more stupid comments by people in power with no real idea what to do?
Action is needed not ideas.
- Harvey Lawrence, london, 12/11/2008 17:55
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Can there be no other way to control the economy than by interest rates. The recent reduction benefited those with mortgages but who else benefited but the banks who actually put up rates on loans other than mortgages so businesses are still devoid of a means of raising cash.The cash released by mortgage reductions helps retailers and importers. This is a very sad state of affairs but more rate reductions will do nothing to solve the underlying problem.
- Jack Thompson, London, 12/11/2008 17:52
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If King is being serious then utter hell is coming. This is a last desperate measure. Sterling will collapse as the UK produces nothing and is simply a consumption machine. How will the national debt be paid? Who would lend to the UK in this situation? The UK would almost certainly have to monetarise the debt ie just print and dump Sterling onto the market. An Argentina situation would arise. Savers would pull there money out and put it in virtually any other currency as the value rises as Sterling falls. I finished that today. Import prices would soar and in 18 months you would have unprecedented inflation. Taxes would have to be raised and expenditure cut and most likely the IMF called in.
I am glad I no longer live in the UK. You guys are welcome to it!
- Mgrelton, London, 12/11/2008 17:46
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When will the politicians realise that encouraging people to borrow more (on top of their unsustainable current levels of personal debt) to stimulate the economy is exactly what got us into this mess in the first place. Have they learnt nothing?
Zero interest rates will also encourage all savers to remove funds from the banks, leading to further liquidity shortfalls. Perhaps the cynical Brown/Darling think that the public should be buying Gilts instead?
- Bc, Witney, 12/11/2008 17:39
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Bank rates at zero and yet even more government borrowing - the ‘pound in your pocket’ is about to become worthless. Outgoing Labour governments have always handed over a economic nightmare to the next governing party. But this one is leaving a disaster of such epic proportions, that we’ll be lucky not to end up bracketed with Zimbabwe in the world basket-case league.
- William Boreham, Mitcham uk, 12/11/2008 17:27
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You can be sure he won't have the courage to make such a drastic cut in interest rates.
- Keith Price, Luton, England, 12/11/2008 16:46
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Won't Brown's need to borrow astronomical amounts of money stop this from happening? Are we going to be talking about a Sterling crisis soon?
- Nigel, London, 12/11/2008 16:40
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Japan has had "free money/zero interest rates" for the last 20 years and Japan's economy has been deflating for this time as well. Simply put ... what goes up must come down, and the UK's inflated asset bubble (property and stocks) is no exception. Zero interest rates will not help. In fact this panic measure will add more panic to the markets.
- Marke, Houston, Texas, 12/11/2008 16:32
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Don't worry this method is tried and tested. They did it in Japan and they are nearly fine now. Mind you that was nearly two decades ago ...
- Carl, London, 12/11/2008 16:19
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Amazingly, yet again, King's months behind time with his pompous public pronouncements.
Again he's doing Darling's 'dirty work' for him, by telling us what we already know, and what we've been 'experiencing' for the past 6 months.
When will this dozy chap realise that Britain's future financial prosperity and prospects are far, far more important than his ruddy Peerage?
You can tell by his demeanour that he has now suddenly realised that he should have started sharply dropping interest rates at least a month ago.
King's obviously now in total shock.
Very worryingly, he's not up to it.
As Crash Gordon's poodle, King's been so far behind the Global Game until now, that I'm frankly amazed we're still on the board.
Tragically for our future generations, in actuality we probably aren't.
This bloke's in La-La-Land.
12 months ago, when we needed an economic guard dog, Brown disastrously re-appointed his sycophantic lap dog.
Frankly, all blame again leads to Crash Gordon.
- Dave, Cumbria, 12/11/2008 15:59
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0%, 1%, 3%? Makes no difference, Mervyn because most of us are either locked into our mortgage deals for a year or so, or else the banks won't pass on the cut anyway.
And as for the poor saps with any money to save, they won't be thanking you either.
Why not have a word in Gordon's shell-like and ask him to do something real to stimulate the economy, like reduce real taxes and duties, rather than tinker around the edges with tax credits for loafers?
- Nobby Clark, Perth, Scotland, 12/11/2008 15:33
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What about savers? People like me who've been squeezed out of the housing ladder, forced to rent in London because property prices have been so high, what happens to our prudent savings if they cut interest rates still further? Once again we're punished to save the ludicrously over-extended middle-class baby-boomers.
- Neil, Notting Hill, 12/11/2008 15:26
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They might as well give the money away. So, how does that help? You cannot divide by zero, and if you multiply by zero, you get zero. Thats going to put most calculators up the creek. Incidentally, Indians invented zero.
- Dhanraj, Basildon Essex, 12/11/2008 15:19
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Zero interest rate? The value of the pound in terms of other currencies is going to drop through the floor. It will be good for exporters, but a nightmare for importers and those travelling overseas. Everyone will be borrowing if next to no interest is payable. Let's hope a bit of sanity returns to Mervyn King.
- Phil Jones, London UK, 12/11/2008 15:17
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