Belfast Telegraph

Bank chief says base rate may fall below 1%

By Robin Morton

Northern Bank chief economist Angela McGowan predicted today that the UK base rate could fall to 1% or lower in the next few months.

She was commenting as the Bank of England’s rate-setting Monetary Policy Committee (MPC) prepared to convene for its next monthly meeting.

The MPC is due to start its deliberations tomorrow and then announce a decision on Thursday.

And the following week, the European Central Bank meets to adjudicate on the base rate in the eurozone, which currently stands at 2.5%.

Over the past two months the MPC has made cuts of 2.5% in the Bank of England base rate, which sits at present at 2%.

But a cut to anything below 2% would take the UK economy into uncharted territory. Never before in the 314 year history of the Bank has the rate gone below 2%.

Ms McGowan said further interest rate cuts would provide an “early New Year” boost for householders and borrowers in Northern Ireland.

She predicted that the UK base rate could fall to 1% or lower “in the near future”.

The Northern Bank economist said: “A downward move in interest rates is good news for households and consumers.

“Such cuts should go some way to bolstering consumer confidence, enabling many to start the New Year with more disposable income in their pockets.

“The hope is that inter-bank lending rates will follow suit by reducing the cost of borrowing for both consumers and local businesses.”

Ms McGowan noted that such cuts would contribute to the UK’s economic recovery but warned that the scale of the expected base rate reduction reflected the scale of the problem.

She said: “Lower interest rates represent a significant shot in the arm for the economy, but it also illustrates how sick the patient is.”

Ms McGowan forecast that it could be half way through 2009 before signs of economy recovery became apparent.

She observed that low interest rates were closely correlated with currency depreciation and that the consumer’s appetite for foreign travel was dampening as sterling weakened.

Ms McGowan added: “In the last 12 months sterling has fallen by 23%, which is restricting the consumer’s ability to achieve value for money on foreign holidays. If consumers decide to take more leisure breaks closer to home; this should contribute to the local tourist industry and economy.”

Belfast Telegraph