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Base rate of 0% unlikely

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by David Masters
Base rate of 0% unlikely

The Bank of England suggested this week that it is unlikely to cut base rates to 0%, but instead will seek to stimulate the UK economy by increasing money supply.

Base rates were cut by 0.5% this month to a new record low of 1%, but the Bank of England has now said that further cuts would not help to fuel the economy.

Minutes from a monetary policy committee meeting this week show concern that further rate cuts could drive the economy into a deeper crisis as mortgage lenders are struggling to pass on rate cuts and still make a profit.

“There might be a point at which further cuts in Bank Rate could have an adverse impact on the economy,” said the MPC, adding that it seems “unlikely that the inflation target could be met solely by cutting Bank Rate.”

Once rates hit zero, banks may decide not to pass on rate cuts, and this would “reduce the effectiveness of monetary policy.”

A Bank of England spokesperson confirmed that Governor Mervyn King has been in discussions with the Chancellor to begin the process of quantitative easing, whereby the government pumps money into the economy through purchasing debt and other assets.

“The Governor has had meetings with the Chancellor and formally communicated the MPC’s wish for authority to conduct purchases of Government and other securities financed by the creation of central bank money,” the spokesperson said.

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News posted: February 20, 2009

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