The Bank of England begins a historic meeting today at which interest rates are all but certain to be slashed to an all-time low to combat worsening recession.
The nine-strong Monetary Policy Committee (MPC) has chopped rates all the way from 5 per cent to 2 per cent since the beginning of October as the economy faces up to its bleakest year since the early 1990s.
The Bank’s official rate has never fallen below 2 per cent in its 315-year history, but experts predict a cut of as much as 1 per cent at the end of the MPC’s two-day meeting tomorrow.
Capital Economics’ Vicky Redwood said: “We think that a 1 per cent cut tomorrow is very possible. And even if the MPC does now start to proceed more cautiously with a smaller cut, we still think that rates will end up at, or close to, zero before long.”
The MPC will ponder the latest raft of gloomy economic data this week, including a 15.9 per cent fall in house prices during 2008, according to 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.
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. This will lead to more house price falls, corporate failures, and rising jobless totals.
The drastic rate 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 add to the downward pressure.
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.
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.
This week the Conservatives outlined plans to help protect savers by proposing to abolish tax on the interest of basic rate taxpayers’ savings.
PA