Interest rates 'may hit record low'
Updated on 12 November 2008
Homeowners and borrowers could see interest rates at record lows next year as policymakers battle to lift the UK out of recession, the Bank of England has signalled.
The Bank's latest gloomy forecasts predict the economy could contract year-on-year by 2% in early 2009 unless rates fall further.
The forecasts showed inflation undershooting the Bank's 2% target by more than 1% if rates remain at 3% - supporting expectations that borrowing costs will plunge below the all-time low of 2%.
Bank Governor Mervyn King gave a stark warning of the difficulties ahead for the UK economy and said "the world had changed" in the wake of the global banking crisis triggered by the collapse of Lehman Brothers.
"We are prepared when the world changes to make big changes to bank rate in response," Mr King added.
Interest rates are currently at a 53-year low after the Bank's biggest cut since 1981 last week. Rates have been lowered by 2% since September.
Asked if interest rates could fall all the way to zero, Mr King said the Bank would set rates at "whatever level is necessary" to restore inflation back to its 2% target.
Answering accusations that the Bank's Monetary Policy Committee (MPC) had been too slow to act to cut rates, Mr King defended the current framework, saying: "I think it's worked well and I think it will continue to work well."
He added: "It is always possible to set policy with the benefit of hindsight... there is no way in which the committee can have perfect foresight."
Based on market expectations of rates before last week's dramatic move, its forecasts show inflation falling from a current record of 5.2% to less than half its 2% target as food and energy prices fall back and demand eases in a looming slowdown. The MPC predicts a 10% fall in energy prices in early 2009 after two rounds of hikes this year.
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