Articles | Experts predict further rate cuts

BoE slashes rates to historical low

Published: Thursday, 8 January 2009, 6:55AM

The Bank of England has slashed interest rates to 1.5 per cent, the lowest level in the Bank's 315-year history.

The BoE's Monetary Policy Committee, which has been meeting for two days, cut borrowing costs by 0.5 per cent from 2 per cent to the lowest since the Bank was founded in 1694.

The MPC has now cut rates by a mammoth 3.5 percentage points since the beginning of October as concerns over a lengthy recession overshadow previous inflation fears.

How much homeowners and borrowers will gain from any rate cut remains to be seen after building society Nationwide said it would invoke a "collar" clause enabling it to stop reducing rates on most of its tracker mortgages. Other lenders could follow suit.

Around 40 per cent of borrowers - more than 4 million homeowners - have a tracker mortgage.

Both Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, and Nationwide state that their standard variable rate (SVR) will never be more than 2 per cent above the base rate, leaving the groups with little choice but to reduce the deals by 0.5 per cent.

They were joined by HSBC, which also said it would be slashing its SVR in line with the Monetary Policy Committee's reduction.

But savers are also in the spotlight following the huge rate cuts seen so far - with those such as pensioners relying on savings to top up their income punished by the lower return on the nest-eggs.

On the rate cut, Stuart Porteous, head of group economics at Royal Bank of Scotland, said: "As rates head towards zero, policymakers will be forced to embark on ever more unorthodox measures to get the economy moving again. Listen carefully and you can almost hear the printing presses being cranked up."

And Howard Archer from Global Insight said: "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 per cent in the second quarter.

"Indeed, it is very possible that they could come all the way down to zero. In addition, it seems ever more likely that the Bank of England will engage in some form of quantitative easing over the coming months, in tandem with the Treasury."

The MPC's latest credit conditions survey warns that lending to households and businesses is set to fall further during the first three months of this year, despite a taxpayer-funded bail-out of the UK banking system.

It also weighed up a raft of gloomy economic data on falling house prices, as well as manufacturing and services activity close to record lows - despite hopes of an export boost from a pound hammered by the recent rate cuts.

Meanwhile, retailing casualties such as Woolworths and Zavvi have mounted on the high street as shoppers cut back.

And speculation is mounting that the Bank and the Treasury could agree a policy of so-called "quantitative easing" - effectively printing more money - to spur on the economy with rates approaching zero and banks still reluctant to lend.

The cuts have come because the MPC's mandate is to keep official inflation at 2 per cent. It is currently well above target at 4.1 per cent, but will fall dramatically as prices tumble on lower demand in a recession, while moves such as the Government's VAT cut add to the downward pressure.