Economists looking beyond zero after half-point rates cut

Published on Thursday 5 February 2009 20:56

INTEREST rates are set to continue their descent towards zero after the Bank of England yesterday extended the most aggressive round of cuts in its 315-year history.

But the effectiveness of another half-point cut, bringing rates to a new record low of 1 per cent, was brought into question by some economists.

Yesterday's decision was widely expected and means that borrowing costs have fallen by a total of 4.25 percentage points since last spring.

Explaining its action, the Bank said the global economy was experiencing "a severe and synchronised downturn".

Central banks everywhere are now having to consider what they do when interest rates hit zero and they still need to give the economy a boost.

The Bank of England recently gained the power to engage in so-called "quantitative easing" – effectively printing money – but there was little mention of such a move in its statement accompanying yesterday's rate cut.

Edward Menashy, chief economist at stockbroker Charles Stanley, said the Bank's monetary policy committee had moved "more out of exasperation than conviction". He said: "It must be asked, why, if a total of 375 basis points of rate cuts have not arrested the decline in demand, then a further 50 basis points should suddenly kick start the UK economy."

Niall Stuart, spokesman for the Scottish Council for Development and Industry, said doubts were growing over the impact of rate cuts.

"We now believe that (the Bank] has to actively look at buying up assets from the banks to free up cash, which will allow them to start lending again," he said.

While the pound gained yesterday on relief that rates had not gone down further, analysts said there would not be much clarity to the rate outlook until publication of the Bank's Inflation Report next week.

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said: "Item believes that interest rates have further to fall – possibly to zero – although we also recommend the immediate implementation of quantitative easing."

Yesterday's rate decision is the first since the UK's recession was officially confirmed.

CBI Scotland welcomed the latest reduction in borrowing costs, but

the Federation of Small Businesses reiterated its concern that the rate cuts were not having the desired effect.

FSB Scottish policy convener Andy Willox said: "Despite the historic, and necessary, rate cuts over recent months, too many viable small businesses are still struggling to get fair access to affordable finance.

"The concern now is that there may not be too much more room for manoeuvre."

&#149 In a widely anticipated decision, the European Central Bank yesterday held interest rates in the eurozone at 2 per cent.