Page last updated at 17:21 GMT, Thursday, 8 January 2009

Uncharted territory for interest rates

Hugh Pym, BBC Economics Editor
By Hugh Pym
Economics editor, BBC News

Bank of England engraving, 1734
Rates are now at their lowest level in the Bank's history

History buffs will have a field day with the latest interest rate move.

The lowest cost of borrowing in the history of the Bank of England has a nice ring to it.

For those who paid double figure mortgage rates in the 1980s and 1990s, an official borrowing rate of 1.5% seems scarcely believable.

Looking back is all very well, but economists and businesses are now focused on what happens in the future.

Where now?

Where does the Bank of England go from here? One school of thought advocates a pause for breath.

Monetary policy, it's argued, needs time to work its way through the economy.

The dramatic cuts since early October will only fully take effect in the months ahead.

But some business leaders have criticised the Bank for not going further than the 0.5% reduction.

They had called for a full percentage point reduction to demonstrate a resolve to stave off a prolonged recession.

Some economists believe the Bank must get to zero rates as soon as possible if a damaging deflationary spiral is to be headed off.

Cautious turn

The Bank of England has certainly come up with a more cautious rate reduction after the more dramatic cuts in November and December.

Bank of England
Rates have been cut to 1.5%.

There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months.

The statement says the Monetary Policy Committee "noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity."

The Bank also repeats its view that "further measures to increase the flow of lending to the non-financial sector" will be needed.

The Bank doesn't say so, but these measures could include boosting the money supply with a policy known as "quantitative easing".

This would see the Bank buying up assets held by commercial banks, such as Government bonds, as a way of getting cash into the banking system.

No green shoots

Its assessment of the state of the economy is as bleak as ever.

The Bank notes that the contraction of the economy accelerated at the end of last year. It says that the outlook for consumer spending, the housing market and business has weakened.

There is not a whiff of any green shoots of recovery.

When it comes to assessing the Bank of England's next move, the history books don't help us very much.

A sustained bid to boost the money supply has not been tried in modern times.

Interest rates have never been closer to zero. This is indeed uncharted territory.

Historical interest rates

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