05 Feb 2009
Feb. 5 (Bloomberg) -- The Bank of England will probably lower the benchmark interest rate closer to zero today as officials resort to buying securities to revive the economy.The nine-member Monetary Policy Committee will cut the bank rate to 1 percent, the lowest since the institution was founded in 1694, according to the median of 61 economists' forecasts. The decision comes at noon in London, and Governor Mervyn King will present updated forecasts on Feb. 11.
As conventional monetary policy tools lose their potency to aid an economy sliding deeper into a recession, Prime Minister Gordon Brown's government has given the bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper. Service companies shrank in January, consumer confidence fell and the inflation rate has dropped at a record pace.
"With unemployment rising, the bank will come under pressure to cut to zero," said David Tinsley, a London-based economist at National Australia Bank and a former Bank of England official. "They'll try to shift the focus to quantitative easing."
King said Jan. 20 that the central bank will buy "high- quality" assets within "weeks and not months" to ease market strains. He and U.S. Federal Reserve Chairman Ben S. Bernanke are pursuing alternative measures to revive lending among banks stung by the global financial crisis.
The Bank of England has lowered its key rate by 3.5 percentage points from 5 percent in October. The Fed has cut its key rate to a range between zero and 0.25 percent. The European Central Bank will probably keep its rate at 2 percent today.
Recession Forecast
Brown and King are trying to rescue an economy that may be heading for its worst year since the aftermath of World War II. Gross domestic product will drop 2.7 percent in 2009, according to forecasts released yesterday by the National Institute of Economic and Social Research.
Confidence among shoppers sank to the lowest level since at least 2004 last month as they found it harder to access credit and after unemployment rose at the fastest pace since 2000 in December, Nationwide Building Society said yesterday.
The slump is defusing cost pressures in the economy and raising the specter of deflation. Consumer prices rose 3.1 percent from a year earlier in December, compared with 4.1 percent the previous month, the biggest drop in the annual rate since records began in 1997. The central bank aims to keep inflation at 2 percent.
‘Rates Will Get to Zero'
"Disinflationary forces are so large, the bank has to lower bank rate by as much as it can without shocking markets," said George Johns, an economist at Barclays Capital in London. "There's no light at the end of the tunnel. We think rates will get to zero."
There may still be reasons for policy makers to pause before cutting interest rates after today. The pound has fallen 26 percent against the dollar and 15 percent against the euro in the past year, bolstering exports.
Lower interest rates are only starting to be passed on to home buyers. The average standard variable mortgage rate fell to 5.38 percent in December, compared with 6.91 percent in October, while mortgage approvals held close to a decade low, Bank of England data show.
Savers will also have little incentive to deposit money in banks if rates go to zero. The Building Societies Association, which represents customer-owned lenders, this week called for the central bank to leave the benchmark interest rate unchanged.
"If the banks are getting a bit nervous because it puts off savers, we may see a more gradual approach," said James Knightley, an economist at ING Financial Markets. "It highlights the key issue of deciding which is more important for the U.K. economy: getting people spending or keeping savers happy. For now, they're going to continue cutting."
