New historic low for interest rates
New historic low for interest rates
Thursday 5th March 2009
The Bank of England today cut interest rates to 0.5 per cent, yet another historic low.The half point cut was widely expected as the prospects for the UK economy worsen and the Bank of England sees its two per cent inflation target is set to be missed as the threat of deflation grows.
The big decision, however, was the move for the monetary policy committee (MPC) to start pumping £75 billion into the economy through quantitative easing.
At the MPC's meeting in February there was a unanimous decision to write to the chancellor to ask for permission to start quantitative easing.
It is hoped by buying assets on the market, the Bank of England will both be able to hold back deflation and also provide more funds to lenders to increase lending and to companies to circumvent the lending freeze.
"Both the Bank of England's February Quarterly Inflation Report and the minutes of the February MPC meeting make it clear that the central bank realises that more action is needed to try and stimulate the economy," said Howard Archer, chief UK economist at HIS Global Insight.
"Furthermore, MPC members have been out in force over the last few days making speeches or giving press interviews, and they are clearly paving the way for quantitative easing to start."
Borrowers waiting to see interest rates cut further on mortgages may be disappointed.
While a number of lenders are expected to cut tracker and standard variable rate (SVR) mortgage interest rates, only those that are contractually obliged to are expected to move.
Last month the MPC noted a further cut in interest rates could hit lenders' profits – as they try to balance the needs of savers and borrowers.
Dr Archer now predicts 0.5 per cent will be the lowest point for interest rates, with the negative repercussions that even lower interest rates might have on the banking sector.
"Given these doubts and concerns, we suspect 0.50 per cent may well prove to be the floor for interest rates, rather than 0.25 per cent or even zero as we had previously thought," he said.
"Quantitative easing is poised to come to the forefront in the Bank of England's ongoing efforts to stimulate the economy."
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