Page last updated at 17:08 GMT, Friday, 7 November 2008

Get set for further UK rate cuts

By Steven Duke
Economics reporter, BBC News

Interest rate graph

"How low can you go?" homeowners are asking the Bank of England after Thursday's dramatic cut in the base rate.

The answer, according to many economists, is down to rates never seen since the Bank's birth in 1694.

A 1.5 point cut to 3% has taken the UK's lending rate to its lowest level since January 1955 - a time when Winston Churchill was Prime Minister, and shoppers were still revelling in the fact food rationing had recently come to an end.

Rates have been slashed amid fears of a sharp slowdown in the economy, with the Bank of England warning of a "very marked deterioration in the outlook for economic activity at home and abroad".

'Nasty recession'

"I think it's quite possible rates will get to an all-time low in the UK," says Richard Jeffrey, head of equities at fund managers Cazenove Capital Management.

BANK RATE FACTS
Current rate - 3%
First rate in 1694 - 6%
Lowest rate - 2% (1939-51)
Highest rate - 17% (1979-80)

"If we look into the middle part of next year, the economy is likely to be in quite a nasty recession.

"And during that period there will be further pressure on the Bank of England to cut interest rates again."

An historic all-time low for interest rates would be below 2%.

The last time lending was at that level was between 1939 and 1951, when the Bank kept rates at a record low during World War II, and the economic rebuilding years that followed.

Throughout the second half of the 1800s, the Bank frequently cut its lending rate to 2% - but never lower.

History might be made in the next few months.

'Trailing the US'

"Even at 3%, UK rates are well above those in the US, when the economic outlook here would seem to be just as bad as that in the States, if not worse," says economist Jonathan Loynes from Capital Economics.

In October, the US Federal Reserve cut its key interest rate twice, taking it down to 1%, well below the Bank of England's base rate, but Mr Loynes expects that difference to disappear in 2009.

He's forecasting UK rates of 1% by the middle of next year.

"The bottom line is that interest rates clearly need to fall further," he says.

For those interested in statistics, here's one more - the Bank of England's first lending rate was 6%.

When can we expect rates to be back in this ball park?

"Not in the foreseeable future, if ever," says Mr Loynes.

Mortgage limits

Yet before homeowners get too excited by the prospect of record low mortgage rates, there's a sting in the detail for those on tracker mortgages.

The question is not "How low can the bank rate go?", but "How low can your mortgage rate go?"

"Many people probably don't realise, but many tracker products have a limit on how low their rate can go," points out Louise Cuming, head of mortgages at MoneySupermarket.com.

Halifax has a minimum rate of 3%, Nationwide's is 2.75%.

"Below those kind of rates, the banks appear to be saying it's not economically worthwhile administrating the product," she notes.

Not all homeowners will feel the full benefit of repeated rate cuts, but others will as lenders cut rates such as their standard variable rate, she suggests.

During the past 314 years, the Bank of England has kept its lending rate within a 15% range. The worst financial crisis in a century looks set to see that change.

"It's not impossible to imagine circumstances under which rates end up having to go lower than 1%," suggests economist Jonathan Loynes.

Get ready to redefine the term "low interest rates".



Print Sponsor


RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites


FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC iD

Sign in

BBC navigation

Copyright © 2019 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific