Interest rates to be held at 0.5%

Published on Saturday 4 April 2009 14:32

THE Bank of England will call time on its interest rate slashing marathon this week when economists expect it to be held at 0.5%.

Following six months of consecutive cuts, it is understood the Bank's Monetary Policy Committee wants to avoid reducing rates to zero amid concerns over how it will affect banks' balance sheets.

Committee members are now thought to be placing all of their hopes on quantitative easing after their historic decision to start printing money last month. Members have consistently voted in favour of taking an axe to rates since last October, when they stood at 4.5%.

But the Bank of England has faced criticism that it did too little, too late, and when it did finally make the decision to reduce rates, the cuts were unable to ward off a potentially deep and prolonged recession.

Although the reductions have benefited those on floating rate mortgages, they have destroyed interest for savers.

Economists warn there is little hope on the horizon for pensioners and others who count on their income from savings as rates are expected to be held at 0.5% for a number of months – possibly even into next year.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We suspect that interest rates are set to stay at 0.50% well into 2010 as we believe that the economy will contract through this year and very possibly beyond.

"Worryingly, latest data and survey evidence point to ongoing very sharp GDP contraction, and offer little hope of any improvement any time soon.

"Quantitative easing is clearly now at the forefront of the Bank of England's attempts to stimulate economic recovery, not only because bank rate is unlikely to come down further but also because the lack of availability of credit remains a major concern. The Bank of England is also hoping to bring down longer-term interest rates through its quantitative easing programme."

Last week, the European Central Bank (ECB) reduced interest rates for the Eurozone by 0.25% to 1.25%.

It is thought that the ECB, will soon follow the Bank of England into trialling untested measures such as quantitative easing.