Rates may fall to all-time low
Updated on 08 January 2009
The Bank of England is set to make history by slashing interest rates to an all--time low to battle a deepening recession.
Rate-setters on its Monetary Policy Committee (MPC) are virtually certain to slash borrowing costs below 2% for the first time since the Bank was founded in 1694.
The anticipated move comes hard on the heels of drastic rate cuts from 5% to 2% since the beginning of October as the UK's economic plight worsens. Rates could fall to as low as 1% when the MPC's decision is announced at noon, some experts have predicted.
Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said the Bank was facing a "balancing act".
She added: "Six months ago, it was juggling slowing economic growth with soaring inflation. Now the Bank has to tread a fine line between avoiding deflation and a further weakening of sterling whilst doing all it can to soften the impact of the recession.
"Given this dilemma, ITEM believes that a 0.5% cut would be appropriate. However, with survey data continuing to worsen, a larger cut of 1% is a distinct possibility."
The MPC will weigh up a raft of gloomy economic data including a 15.9% fall in house prices during 2008, as reported this week by building society Nationwide.
Despite hopes of a boost from a weaker pound, survey data from the UK's manufacturing and services sectors show activity levels close to record lows.
Meanwhile, retailing casualties such as Woolworths and Zavvi have mounted on the high street as shoppers cut back. Updates from the likes of Marks & Spencer, Next and Debenhams have been better than feared but they still reported declining sales as consumer confidence slumps.
And the Bank's latest credit conditions survey warns lending to households and businesses is set to fall further during the first three months of this year - leading to more house price falls, corporate failures, and job losses.
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